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Date: 21 May 2008 |
Compiled by Mr. M. Sathya Kumar |
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Indian tax system: One of the most unfriendly It was John Maynard Keynes who said, "practical men, who
believe themselves to be quite free from any intellectual influences, are
usually the slaves of some defunct economist...soon or late, it is ideas, not
vested interests, who are dangerous for good or evil." Whether this dictum is true or not, it certainly is not valid in
the case of taxes. Surely, vested interests have played a significant role in
shaping the tax policies in seeking and securing exemptions, preferences and
concessions and thereby, complicating the tax systems and making them
business unfriendly. Indeed, in India, a fertile ground for their operation was
created by the requirements of planning, pursuit of multiple objectives and
discriminatory taxation required by them. 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 to the economy. The effort should be to raise the required revenues by
minimising these costs. A growth-oriented tax system should focus on
minimising compliance costs and resource distortions created by the tax
system. Therefore, the best practice approach to tax policy is to broaden the
base, levy low and less differentiated rates and keep the tax system simple
and transparent. It is also suggested that taxes should be on incomes and
consumption rather than transactions and turnovers. The suggestion is also
that the growth-oriented tax system should reduce the cost of operating in
the formal sector and increase the cost of operating in the informal sector. Unfortunately, in the hurly-burly world of politics, such noble
considerations hardly find a place and most tax administrations in developing
countries are insensitive to them. According to the recent publication by the World Bank,
"Paying Taxes 2008: The Global Picture," the Indian tax system is
one of the most unfriendly to businesses in the world. India ranks at 165 among the 178 countries and among the South
Asian countries, it is the lowest (see the table). This should really be of concern to policymakers and
administrators in India if they have a developmental concern. But this has
hardly raised any notice. The real question is whether the Indian tax system
is really that bad or is it another advocacy by businesses or simply a
sensational finding which merely deserves to be ignored. The World Bank uses a simple methodology. It takes a standard
modest-sized firm in every country and ranks the countries on the basis of
three factors, namely, the number of taxes paid, the time taken to pay and
total tax rate of all taxes paid by the company. Ease of
paying taxes rankings in South Asian countries:
The study includes all taxes - on income, consumption and
capital taxes levied by all levels of government. The selection of the
"representative" firm and technical data required for the analysis
are provided by the PricewaterhouseCoopers. Does the indicator really represent development orientation in
tax policy? A close look at the methodology raises serious reservations on
the relevance of the measure altogether. First, in choosing the case study company, a number of
judgements are involved. The entire analysis is based on the private data
compiled by the company and not on data available in the public domain and
there are serious questions of reliability. Secondly, the very fact of choosing a consulting firm with known
views as a partner should raise eyebrows. The argument that the same firm is
used to collect the information everywhere and the biases, if any, would be
random is simplistic. There is scope for using judgements and this brings in
serious questions of comparability. The measure neither calculates the
compliance cost nor the distortionary cost. Doubts can also be expressed on the three variables chosen to
determine the rankings. Surely, the number of taxes creates a nuisance value
but is it such a major issue to firms? The time taken to comply with the tax
in the study includes preparatory time, filing time and payment time. But the
lower time taken is not the only factor determining the compliance cost. Further, one can reduce the time taken to comply with the tax by
paying bribes. There are serious problems with taking the total tax rate
measure. It is measured as the ratio of each of the taxes paid to profit
before tax of the company and aggregated for all taxes. Thus, the ratio of customs, excises, sales taxes, property
taxes, individual income taxes and corporate profit taxes to the profit of
the company is taken as the total tax rate. This comes from the philosophy
that tax is an evil and imposes only a burden and not a means of providing
generalised externalities. The question is, are the taxes levied merely to impose a burden
or to finance externalities? Besides, the firm itself does not pay all taxes;
it merely collects them for the government, be it a sales tax or income tax
deducted at source. This study is yet another case of the World Bank trying
hard to bring down its own credibility! All this, however, does not negate the fact that the Indian tax
system has significant compliance and distortionary costs and the tax
departments will have to brace themselves to remove them to impart
development orientation. The introduction of Goods and Services Tax will be important,
but reform does not have to wait for that. Clearly, there is a case for
merging a number of state taxes such as entertainment tax, electricity duty,
passengers and goods tax, entry taxes and luxury taxes on hotels with the
VAT. Similarly the central government can do away with taxes like
security and commodity transaction taxes and cash withdrawal tax which
increase the transaction costs of conducting businesses and hinder the
development of the markets. Most of all, the tax policy makers and administrators will have
to change their mindsets and show greater sensitiveness to impart growth
orientation. The author is director, NIPFP |
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