THE ECONOMIC WEEKLY M a r c h 10, 1962

Tax Payer Psychosis in India Pranab Kumar Bardhan

In a country which has embarked on a programme of planned economic development under Slate auspices, one would have thought that a primary task of the Government would be the purposive overhaul of the resource-gathering machinery- But even after more than ten years, one sees the same old bullock-cart lumbering on, with a few decorations added here and there.

Our tax structure, for example has remained as shoddy and inefficient as ever. There -was, no doubt, the Krishnamachari interlude around the middle of the last decade. It came, we are told, with a bang; but it ended in a whimper.

The ultimate result was that we had a number of brave new taxes duly entered in the Statute Book but carefully sterilised as to have little effect on our resource position. The tax policy in subsequent years, lacking in imagination and boldness, moved back to the old groove and the Government has remained content with some timid tinkerings with the system.

But what is worse, the last decade has witnessed the perpetration of certain false notions regarding tax policy, taxable capacity, or tax payment as such— notions that seem to stand in the way of future develop­ment. These are easily explodable myths but when they are so widely held, even in the Government, it is necessary to demolish some of them.

LET US start w i t h the general question of tax payment . Histo­

r i ca l ly taxes have been resisted in many countries on grounds of l i be r ty and freedom. In India under the B r i t i s h rule taxes tame to be looked upon as instruments of po l i t i ca l and economic domina t ion and an a t t i tude of hos t i l i ty towards taxat ion was part of the national struggle for freedom (the salt tax episode and a l l t h a t ) . This a t t i ­tude was unfor tunate ly tended to persist. Today we may have to pay for it as we are already pay ing for some other legacies of our freedom movement. Independence should have brought in its wake some feel­ing of iden t i ty w i t h and responsi­b i l i t y for the Government, hut the at t i tude to taxat ion has not chang­ed. Whi l e it is widely admit ted , o ra l ly at least, that addi t iona l taxa­t ion is a part of the calculated sacrifice that w i l l have to be paid for economic development tax pay­er resistance to add i t iona l tax mea­sures continues unabated.

Not merely do we resist tax im­posit ion. Tax evasion is one of our more profi table enterprises in which much of our legal talent, business organisat ion and executive dexter i ty are invested. A socialist indus t r ia l society, wh ich is our ideal , requires as an essential precondi t ion a code of honesty, d isc ip l ine and c iv ic obligations. T a x evasion is only one aspect of the general absence of such a code in what is stilly an essentially pre- indust r ia l society. I n the f l u i d s i tuat ion o f today whi le

the obl igat ions of the t rad i t iona l society are losing their force, new standards of impersonal fairness and obligations are yet to emerge.

Most Lightly Taxed in the World

That we are among the most l i g h t l y taxed people of the wor ld is hardly credible to many of our tax­payers. True, we are also among the poorest nations of the w o r l d and as such our taxable capacity is low. But the fact remains that the p ropor t ion of national income that we pay in taxes is low even com­pared w i t h that of some other poor countries of Asia and A f r i c a . What w i t h the m u l t i p l i c i t y of taxes on paper and interested propaganda, an impression of excessive rax burden has been created.

T h e G o v e r n m e n t s tax pol icy . w e are often to ld , is destroying busi­ness incentives and thereby k i l l i n g the goose that presumably lays golden eggs. First of a l l . in regard to some pr ivate business ac t iv i ty in India today, it is rather a reduction of incentives that is required. Over the last decade pr ivate enterprise has often ignored Plan pr ior i t i es and dis tor ted the planned ra t io of publ ic to pr iva te investment. Secondly, i t appears that in public discussion as we l l as in text books of pub l ic f inance the disincentive effects of marginal increases in taxa­t i on have been exaggerated. Des­p i t e the ' c r i p p l i n g ' burden of taxa­t ion , I n d i a n pr iva te business seems to have been do ing rather w e l l . A n d f inal ly i t can be pointed out that

the increasing use of Government revenue to finance social and eco-nomic overheads has improved op­portunit ies for pr iva te enterprise.

No Scope for Direct Taxes ?

Another popular not ion is that direct taxat ion has long since reached its m a x i m u m stretching poin t , what w i t h the impressive ar ray of new taxes. But poor admi­nis t ra t ion and l ibera l exemptions have made these prac t ica l ly ineffec­tive, in a country where income f r o m proper ty constitutes more than 25 per cent of national income, the Weal th Tax produced in I960 61 a sum that came to only 0.05 per cent of nat ional income. The total yield of the Weal th Tax. the Expendi ture Tax. the Estate Duty and the Gifts Tax amounted to only 0.08 per cent of national in­come in that year. Whi l e it is t rue that the rates of few app ly ing to h igh incomes are steep this seems to have resulted only in a high mar. git ial propensity to evade taxes.

Over the last decade, there has actually been a decline in the im­portance of direct taxa t ion in our tax structure.3 Taxes on income and p rope r ty cont r ibuted 32.6 per cent of our to ta l tax receipts in 1951-52; the percentage has gone down to 29.5 in 1960-61. The total of a l l direct taxes pa id by income-tax assessees came to 1.96 per cent

1 Dr V K R V Rao. ' Public Finance, Economic Growth and Redistribu­tion of Income in India', The Eco­nomic Weekly, August 26, 1961.

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of the national income in 1951-52 and 1.92 per rent in 195960 , whi le the p ropor t ion of nat ional income received by this class, rose f rom 7.9 per cent to 9.3 per cent in that per iod.

There is evidence enough to be­lieve that in the last decade the largest beneficiary of economic de­velopment has been the "upper mid ­dle class cons t i tu t ing the assessces earning between say Rs .10,000 and Rs 25.000 per annum. A n d this is the group that is most l i g h t l y taxed under our income tax system com­pared w i t h the corresponding i n ­come group in some other countries. Take for example, an ind iv idua l in India w i t h wife and two chi ldren, earning Rs 12,000 a year. He is more than eight t imes better off than the average India'n f ami ly . A Japanese w i t h equivalent income is only three times better off than an average f a m i l y of his country whi le an Englishman and a Dutchman s imi l a r ly placed are a l i t t l e below their nat ional average levels; but the income tax payable at this income is Rs 637 in Ind ia (i e at the rate of 5.3 per c e n t . Rs 2.067,3 in Japan (i e 17.2 per cent) Rs 1.150 in Hol land (i e 12 per cent) and Rs 703 (i e 5.8 per cent) in the United K i n g d o m . Thus the upper middle class in Ind i a whi le enjoy ing a comfortable posi t ion relative to the rest of society, is let off com­parat ively l ight ly in income taxa­t i o n . But curiously enough, in tax resistance it is among the most vocal sections of the people.

Taxat ion and Foreign Personnel

Another widespread idea is that the Ind i an system of personal taxa­t ion is burdensome for foreign tech, ideal personnel. This is true only

- Dr I S Gulati, '' Resource Prospects of the Third Five- Year plan ", I960, p 84.

if applied to the highest levels of income. For a considerable span of income ranges, however, inter-coun­try disposable income and cost of Jiving comparisons reveal that the fore ign technician or executive m i g h t well be better off in Ind ia than in his own country .

Table l presents the net money incomes of marr ied indiv iduals w i t h two ch i ld ren in the U S A, U K and West Germany and the compu­table net real incomes of these in­dividuals i'n Ind ia , f o r example, a person earning £1.000 w i l l be left w i t h £971 net (after t ax ) income in the USA, as compared to £9.36 in Ind ia . 1925 in the UK and .£891 in West Germany. But. as the cost of l i v i n g in Ind ia is lower than in the U K and the U S A and is al­most the same as in West Germany these net incomes would mean much less in real terms in the U S A ami U K. Thus 1971 of net income in t he U S A i s actually equivalent t o only £'699 in terms of purchasing power. Bui the Indian tax system w o u l d , at that level give a net in­come of £936; so an American darn­ing a salary of £1.000 per annum would benefit despite the higher rates of Indian taxat ion. to the tune of £237 only because of the cheaper cost of l i v i n g . This real gain continues up to a level of £5.000 a year in the case of an American. £1.000 in the case of an Knglishman and £2.000 in the case of a German.

Agricul tural Sector Several proposals have been for­

mulated in the last few years for a more intensive taxatio'n of the agr icu l tura l sector. But nearly all of them have stumbled on the ques­t ion of pol i t ica l feas ibi l i ty . Pea­sants arc hard to tax and hi a pre­dominant ly rura l country, the pol i­tical difficulties of implement ing a

programme of agr icu l tu ra l taxat ion are understandable. But one won­ders if We are not exaggerating the pol i t ica l r isks involved. The fact remains that whi le the upper income group in agr icu l ture which bene­f i ted most f r o m the ag r i cu l t u r a l prosperi ty of the last decade, pays in taxes only a mere fract ion of its income (see Table 2 ) , po l i t i c a l pressures have served to c i rcum­scribe an impor tan t source of addi­t ional resources.

A concomitant development has been the increase in indi rect taxa­t ion . Revenue f rom State and Central taxes on commodities and services rose f rom Rs 445.7 crores in 1951-52 to Rs 823.2 crores in 1960-61. The argument, to quote "The T h i r d Eivc Year P l an" is that " i n a country l ike India where the bulk of the people are poor, resources on an adequate scale cannot be raised wi thout cal l ing for a measure of sacrifice f rom all classes of the people". But. as Kaldor stressed and as is so often forgotten, such a measure of sacri­fice f rom the mass of the popula­t ion should 'not be called for wi th ­out first toning up the system of direct taxat ion and getting the most out of i t .

It is also made out sometimes that there is an element of progres­sion even in indirect taxes because of the substantial taxat ion of lux­ury and semi-luxurv articles. In th i* connection. Table 3 showing a commodity breakdown of U n i o n Ex­cise Duties is of some interest.

Thus we see that while the pro­por t ion of duties on "wage goods"" to total Central Excises has re­mained at about 40 per cent, of those on "amenities and luxur ies" has declined f rom 52 per cent in 194849 to 27.2 per cent in 1960-61.

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* This Table is adapted from a similar one iit my earlier article 'Agriculture Inade quately Taxed', The Economic Weekly, December 9, 1961, with the • different*? that the figure for indirect taxes in 1959-60 is now calculated on the basis of a study recently published by the Tax Research Unit of the Department of Economic Affairs, which dhows that households in rural areas spending above Rs 300 per month paid in 1958-59 about 7 per cent of their expenditure as (indirect taxes com­pared to 4.4 per rent in 1953- 54. Other assumptions of the Table are as before

† "Wage-goods" consist of kerosene, sugar, matches, vegetable products, coffee, tea, foot-wear, soap and cotton cloth. (Revenue from the additional excise duties on textiles is included, though a part of it belongs to other textile fabrics, as the separate breakdown is not available). 'Amenities and luxuries' include tobacco, artificial silk, woollen fabrics, motor spirit, motor cars, electric fans and electric bulbs. (The yield from tobacco is partly from manufactured ami partly from unmanufactured tobacco. But as a separate breakdown is not available, the total is included. 'Industrial Raw Materials and Intermediate Products* include steel, cement, coal, tyres, diesel oils, electric batteries, oils and oilseeds, vegetable non­essential oils, paper, paints and vvarnishes. rayon and synthetic fibres, industrial fuel oils, copra, etc.

The figures in the Table are gross figures ( i e they do not exclude refunds and drawbacks) as the breakdown of refund for each of the items is not available

W h i c h section of the people is h i t hardest by these Excises is easy to infer . I t must also be remembered that the prices of many of the ess­ential commodities of ten go up by more than the amount of the excise and also tha t excises on many in­dus t r ia l raw materials (e g oils, and oilseeds, soda ash, caustic soda, etc) go to increase the cost pr ice of some of the wage-goods (e g soap, paper e t c ) .

There is an i t em of taxat ion that is excellent f r o m the standpoints of both p roduc t i v i t y and conveni­ence to the tax-payer, but i t s adop­t i o n i n the e x i s t i n g ' po l i t i c a l c l i ­

mate is h igh ly un l ike ly . I t is esti­mated that a Salt Tax of say, Rs 2 per maund, would impose a burden of only a l i t t l e over Rs 2 per annum on the average f a m i l y ; and yet-assuming the product ion of salt to expand at the same rate as popu­lat ion, receipts w o u l d amount to Rs 125 crores over the T h i r d Plan per iod . Tha t we continue to feel s t rongly about the Salt Tax is pa r t of a general sentimental cofusion which bedevils our nat ional l i fe . Already in the post-Independence per iod we have spent much of our t o iL tears and even blood over issues falsely sentimental ( p r o h i b i . t i on . cow-slaughter, l ingu is t i c States,

e t c ) . We w i l l do ourselves fur ther harm if on our way to economic development, impor tan t resources are f r i t t e red away for no better rea­son than that we allow ourselves to be so many touchy puppets of past events.

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