Taxation policy – Economic development

The corner stone of a welfare state is its economic policy, how it is going to fund its various development programmes from the various avenues of revenue generation. Taxation be it direct or indirect is the most important, most effective method of revenue generation.

In the light of this scenario, it is important to note that government has placed on the anvil for public reference a new, Direct Taxes Code which will have far reaching implications on the existing tax structure.

On the Indirect Tax Front too, the changeover to VAT and GST will have a lot of adjustments to be made from the point of view of the trade and commerce.

Tax is a unique instrument of mobilization of resources available with any Government. Apart from raising revenue for the Government, income tax provisions are being used extensively to promote social welfare, health care, education, rural development, generation of foreign exchange etc. and to fight the economic evils such as recession, fiscal deficit, parallel economy etc.

Growing internationalization of economics has made it imperative that taxation policy in a country be formulated not only keeping in view the internal factors, but also the circumstances prevailing and policy being adopted in other countries of the world. Fiscal policy, like any other governmental policy, derives its meaning and direction from the aspirations and goals of the society within which is operates, and of the people whom it serves.

Taxation policy, which is an integral part of fiscal policy, helps in achieving social and economic objectives, removing inequality and in providing resources necessary for infrastructure development.

Taxes may be either direct or indirect. Direct taxes which are payable directly by those on whom they are charged, ensure equity and are straight forward and easy to administer. Indirect taxes, on the other hand, are usually shifted and often increase the cost of goods and have to be borne by the people without knowing the burden of such taxes on their income.

Considering these facts tax administrators are in the look out for those provisions of income tax in the other countries of the world which have been more successful in achieving its objectives whether it be better mobilization of revenue, better tax administration, compliance and social welfare. Multinational enterprises on the other hand are evaluating the system of taxation such as tax rates, exemptions, compliance cost in different countries of the world for locating its branches and production facilities. Hence a comparative analysis of income tax provisions and practices becomes relevant.

A sound tax policy is one where income tax charged from the people serves both the objectives, namely equity and revenue generation, gets the support and confidence of the people, and which brings harmony in achieving various social and economic goals.

The overall growth of an economy depends upon several factors including savings, investment, production, export surplus, and political stability. Direct taxes encourage savings through tax incentive schemes. These incentives help in promoting industries in those areas which are not very profitable but at the same time are important for the overall development of a country. While framing the tax policy, the government takes into account the following factors:

Social factors: Taxation is widely used to fulfil social responsibility. The increase in the number of aged persons, changes in the family system, rise in the number of single-parent families, all these affect the taxpayer and taxable income.

Economic factors: The overall economic growth of a country in terms of agricultural production, industrial production, and infrastructure development affects tax measures largely. While designing the tax policy, growth in GDP, per capita income, price index, inflation rate – all these factors are taken into consideration.

Political factors: Political stability is very important for any successful tax reform. Frequent changes in the Government are not desirable. Every new government introduces changes in tax rates, deductions and exemptions, partly to prove more efficient than the previous government and partly to give benefit to a particular group or a particular community to take some political advantage.

Technological factors: Tax policy is also affected by technological advancement. The growing use of computers and internet has helped in making calculations faster, in maintaining accurate records and in communicating with the taxpayer.

Taxes, like death, are inevitable, but they necessarily involve costs. These are the collection cost to the Government, compliance cost to the taxpayers and cost of distortions of the economy. The effort should be to raise the required revenues by minimizing these costs. A growth-oriented tax system should focus on minimizing compliance costs and resource distortions created by the tax system. Therefore, the best practical approach to tax policy is to broaden the base, levy low and less differentiated rates and keep the tax system simple, transparent and easy to administer.

Taxes are as old as civilizations. Taxes are imposed so that a government may perform its traditional functions (defence and maintenance of law and order), undertake welfare and developmental activities, and make provision for public good to satisfy collective needs of the people. It has also to pay for its own administration. It needs financial resources for these purposes and taxation is one method of transferring money from private to public hands.

References to taxes in ancient India are found in “ARTHASHASTRA” the famous work of Kautilya. “ARTHASHASTRA” embodies values, norms, and beliefs pertaining to public administration, economics, ethics and diplomacy. Taxes in ancient India were levied both in cash and in kind and were collected by local officers. Major sources of revenue for the king included land tax, octroi, taxes on liquor shops, gambling houses and on professionals.

In his work “RAGHUVANSA”, Kalidasa, the greatest Sanskrit scholar of ancient India, observed, “Just as the sun extracts water from the reservoirs and gives it back in the form of showers, so does the ruler extract tax from his subjects and give it back to them in the form of prosperity”.

Manu said – as the bee draws honey from flowers (without endangering or destroying them), the king shall draw moderate taxes annually from his subjects. (VII, 129). Let not the king cut his own root by levying no taxes nor the root of the people by levying excessive taxes (VII 139). The great Rishi Yajnavalkya said, a king who enriches his treasury by oppressive methods would, before long, be deprived of his prosperity and meet with destruction. The fire generated by the heat of oppression does not quench without consuming the prosperity and family of the king.

Adam Smith in 1776 in his famous work “The Wealth of Nations” laid down following four canons of taxation:

These four canons are usually described as equality, certainty, convenience and economy. Certainty and convenience every administration tries to achieve, but often fails. Equality in taxation is most debated. The search for equally in taxation is never ending and yet is rarely attained, so is economic stabilization. A well-planned and well thought of tax system contributes to economic stability by stabilizing the level of income and employment but there are factors such as population, poverty and ignorance which contribute to obstruct achieving stability.

The primary objective of tax policy in developing countries is to mobilize resources for the public sector to finance welfare and developmental plans. The extent to which tax policy is used for this purpose is a matter of interest for national policymakers and foreign aid donors. Foreign governments and international organizations usually assess the efforts made by recipient countries to raise resources domestically.

Level of taxation in a country is traditionally judged in terms of the ratio which taxes bear to some measure of national income. This ratio is called tax-GDP ratio and the change in it is determined by variations in both the numerator (total tax revenue) and the denominator (national income).

A direct tax is one the ultimate burden of which falls on the person on whom it is levied. In other words, it is a tax that cannot be shifted from the original payer to someone else. It is contrasted with indirect tax which can readily be shifted to ultimate consumers of the commodity or service taxed.

There is no legal definition of direct and indirect taxes in India. Taxes under the charge of Central Board of Direct Taxes are direct taxes while those administered by the Central Board of Excise and Customs are indirect taxes.

It is customary to explain the limited role of direct taxes in developing countries in terms of their peculiar circumstances which include large agricultural sector of subsistence nature, small-scale industrial activities, lack of monetization and accounting practices, and low levels of income. Even a modest exemption limit of personal income tax keeps the vast majority of income earners outside the income tax net.

Present scenario

Corruption is a cancer eating into the roots of the society. It is difficult to fight against corruption because the chances of success are bleak but this no reason for despondency. Nobody is born corrupt; it is the vitiated atmosphere in the society and the system of governance which converts the clean into the corrupt. An honest person resists corruption but allurements and temptations at times prevail upon him and once corrupt, even an honest person prefers and finds it convenient to stay corrupt. The seeds of corruption are sown in the mind of the man and the cure, if any, lies in eradicating the seeds of corruption from his mind. An honest revenue official says “The honest are hounded; they are humiliated; they are ignored; they are manipulated; they are used, they are punished; they become the laughing stock in society and in their families; even their very honest is suspected. In spite of that, there are many honest officers in the department who remain honest against all adversities. They are a special species; they have to be preserved and protected.

Conclusion

It is heartening to find that the Hon’ble Supreme Court and various High Courts are taking cognizance of high-handedness on the part of tax authorities and levying cost and damages. It deserves to be charged from the wrong – doer and a black mark is put on his character report. It is opportune time to handle the endemic menace with strong measures and bold decisions. I would like to conclude by reproducing the loud and significant observation of the Hon’ble Supreme Court in the case of Panna Lal Brijraj as early as in 1957: ‘A human and considerate administration of the relevant provision of the IT Act would go a long way in allaying the apprehensions of the assessee and if that is done in the true spirit, no assessee will be in a position to charge the Revenue with administering the provision of the Act within evil eye an unequal hands’. In my humble view, what is needed is – an introspection self assessment by the tax authorities and to evolve ways and means whereby to change the work culture for public good and in public interest. What is required is: Unity of thoughts, Unity of understanding and Unity of action to achieve the goal to levy and collect tax as envisaged in the Article 265 of the Constitution with due regard of dignity, liberty and humanity of tax payers.

It is high time that the tax administration, tax professionals and tax-payers consider them as honourable and respected members of a dignified Joint Hindu Family, with no right of division and with an avowed objective to respect and trust each other and uphold dignity and unity of Bharat, the largest democracy of the world. It is shameful to breed and nurture corruption in the highly cultured, civilized and religious country of Rama, Krishna, Buddha, Mahaveera and Mahatma Gandhi.
To conclude: We need –

1. To devise credible strategies to tap this vast reservoir of tax so as to leap frog in the race for social and economic development.

2. There must be utmost emphasis on the creation of transparent and non-discriminatory tax administration – regulatory regime which minimizes scope for corruption and arbitrary exercise of power.

3. We have to learn important lessons from the western world of duty, discipline, trust, mutual respect, time management, efficiency and punctuality.

4. We must use the coming into existence of the WTO regime to promote a culture of efficiency and higher productivity.

5. Our tax policy must be viewed in an integrated holistic perspective.

6. We must equip ourselves to face the global economic environment – both opportunities and challenges and seize the opportunities now on the horizon; and

7. Our public finances need to be restructured and reformed to cut fiscal deficits and to generate resources for additional – in nation infrastructure, health care, education and social security and protection of the weak and the under privileged.

I hope that the tax administration and tax professionals can mobilize their resources to assist in the reversal of this adverse turn in the economy of our nation. We need to recapture the spirit of idealism and self sacrifice which characterized our freedom struggle; working unitedly, we can bring back economic revolution and lost glory of the nation.

• The economic recession is thus caused by the reduction of purchasing power in the masses which is due to the very dynamics of unregulated growth. The productive capacity has been enhanced enormously, but the vast majority of people are too poor to buy.

• To my mind one of the methods of resolving the economic recession is to reduce taxes drastically.

• The situation in India today is that while we have recently increased the number of billionaires in our country, the poor have become poorer and even the middle class is finding it difficult to make two ends meet because of rising prices. This is a dangerous trend and if continued is going to lead to widespread social turmoil and social unrest. It is totally unfair to the vast masses of our people and it will not be tolerated very long.