Stripped of all the verbiage the main function of a government is to collect taxes. To do so effectively and successfully it must preserve order and stability; and ensure conditions to keep the economy growing. The more it grows the more revenues it collects and therefore how much it collects is the truest index of its success. The power of a nation is directly related to the revenues it realizes from its citizens. The United States is powerful because it collects almost $8800 per capita from its citizens.
Those who predict the imminent rise of China and then India to the rarefied heights of being a global power do not seem to realize that China collects only $390 per capita and India only $110 per capita. I have particularly in mind one official in the Ministry of Finance who goes from meeting to meeting with a PowerPoint presentation of in a few years India will be a world power in a few decades giving rise to much self delusional optimism among the national elite. There is no doubt that the GDP’s of China and India will close in on that of the USA within the next three or four decades. But we will still be nowhere near the USA when it comes to that raw index of true power. How much money does the State have to spend?
A State has four main streams of collecting taxes. These are corporate and personal income taxes; and customs and excise duties. Every year as the budget proposals for the next year are being written there is a general clamor from Trade and Industry bodies like the CII, FICCI and Assocham pleading for a reduction of the rates of all these. While they package their pleas with what purports to be sound economic logic, the real logic is just that the fat cats want to get still fatter.
Of course taxes ought to be reasonable and balanced to give the State more money to spend without imposing a back breaking burden on its private and corporate citizens. To find this reason and fine balance is what good government is all about. Too high an incidence of taxation will not only encourage cheating on taxes but will make industry and commerce unprofitable and dis-incentivize individuals. There was a time in this country when personal income tax was as high as 98% for the highest slab. The consequence was that there were few honest people at the higher slabs. Cheating the State became a common practice. With the rates now much more sensible this is not so common. Ditto for customs and excise duties. The only outcome of the extortionate rate of taxes we used to have only a few decades ago is still seen in the continuing incidence of corruption in the tax collecting departments of the government. It is no wonder then that an IRS son-in-law is still a prize catch for many a family!
But are taxes still too high in India? Let’s take corporate taxes. The USA and Japan top the list with 40% and 40.69% respectively. Germany collects 38.36%, Italy 37.25% and Canada 36.10%. Among the G-20 countries only China imposes a smaller percentage than India. China’s rate is a flat 33% and India’s is 33.99%. China’s rate has been steady at 33% for the past five years while India’s has declined by almost 2%. As a matter of fact only India among the G-20 has been steadily reducing the incidence of corporate taxation. Despite this uncollected taxes are on the rise.
The government could have been richer by a gargantuan Rs.5.8 lakh crore if the IT department had not been dragging its feet over recovering the amount in time or holding up files in appeal cases at the Commissioner of Income Tax level. Another Rs.2.1 lakh crore that is stuck in litigation cases at the Income Tax Appellate Tribunal, high courts and the Supreme Court. The total figure is now over Rs.8 lakh crore.
These figures have been highlighted in the latest report of the Comptroller and Auditor General of India tabled in Parliament. The report points out a tax demand for Rs.2.9 lakh crore remained uncollected at the end of March 31, 2011. "The recovery mechanism is inefficient as certified demand remaining uncollected increased to Rs.1,06,990 crore (96.3 per cent) in 2010-11 from 26,703 crore (75.8 per cent) in 2006-07," the report adds.
Quite clearly this has more to do with the usual bad habits and bad government than high taxation? Meanwhile in the case of the USA the average corporate tax rate had risen by as high as 6%. Fighting two wars can be an expensive business. But so can modernizing a nation and fighting poverty by creating 12 million jobs a year.
In the details provided by Mr. Chidambaram in last years budget proposals is another gem. The effective tax rate for Public Sector companies was 23.35% while that of the Private Sector that CII and FICCI champion was just 19.50%. The IT sector has become the bellwether of Indian enterprise. The IT majors have been performing exceptionally not just in the stock market but also in the real world. They have been posting income gains and rising profits year after year. One would have thought that the self professedly socially conscious leaders of this sector would have given the State, which has also got to cater to hundreds of millions of people living well below an acceptable living standard, something for giving them large catchment area of math proficiency. On the other hand the IT sector took away Rs. 11,880 crores as deduction on export profits. The telecom sector is adding almost 12 million new subscribers each month now. It took Rs.6850 crores in exemption. And these are the sunrise sectors. I dread to imagine what the new day is going to be like then?
But what must cause the MoF even more concern is that China’s government revenues have been growing by almost 17% each year since 1998. And India’s has been growing relatively slowly at 12% in comparison. It’s true that their GDP has been growing faster than ours. But it is also true that they collect more taxes and give far lesser write-offs.
