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Deciding the tax rate Factor in the bribe rate too

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An informal survey conducted over the past three years revealed that the revenue generated in one city on account of `bribe taxes' (`charges' collected by government employees) is Rs 3-5 crore a day. At the national level, this adds up annually to a whopping Rs 50,000 crore. Extrapolating this in combination with the under-collected taxes, our tax-GDP ratio is highly comparable to many developed economies, says R. Vaidyanathan, adding that the Finance Minister must recognise the bribe tax and reduce regular taxes so that the misery index of citizens is minimised.

R. Vaidyanathan

THIS is that time of the year when all discussion leads to Budget preparation, particularly taxation. There is an advertisement, often shown on TV, in which a young boy exhorts his father to be honest and pay taxes, which will help in the process of building infrastructure, etc. But, unfortunately, there is no advertisement in which a government official is exhorted by his son or daughter to avoid taking bribes.

The index of middle-class misery can be measured by adding up the tax rate, inflation rate and corruption rate. The last is not discussed in open fora by businesspersons since they are worried about the next round. Of course there is a conspiracy of silence among political leaders too, as they are often the source of this malaise. The political class is so privileged that it is excluded from the "traumatic" fringe benefit tax. One argument could be there is nothing "fringe" about the benefits enjoyed by the political class!

It is unfortunate that the smaller the business, the larger the share of bribe to be paid to the minions of powers-that-be. For instance, a retail vegetable vendor earning Rs 200-250 per day may end up paying Rs 20-25 as bribe to the police and other `agencies'. This comes to nearly 20 per cent of gross revenue, and a phenomenal proportion of net revenue.

Government employees collect taxes on "client account," that is, for the government and on their "own account." Often, rather than supplement the regular official income, the "own account" collections significantly exceed it. The collection on the "client account" can be done only by employees in tax-related (like direct and indirect taxes) departments. But that on "own account" can be done for any human endeavour of any citizen for inaction, speed, or by inducement, lure, threat or intimidation by any Government employee or his agent. It is to be noted that without political patronage "own account" taxes bribes, in simple terms cannot exist.

We can call this `bribe taxes' to distinguish it from taxes by Budget. It is also a total solution situation existing from womb to tomb of a citizen. To get a birth certificate, parents need to pay a bribe upwards of Rs 500 (depending on the number of originals needed). For collecting a death certificate, the payment can run in to thousands of rupees if the government official senses that it is important for transferring huge amount of assets.

Recently, there was a report that in Government hospitals in Bangalore, a newborn child is shown to the mother only on payment to the hospital employees engaged to provide "service" to patients. The " fee" is Rs 200 for a boy baby and Rs 100 for a girl, which reveals an obnoxious gender bias, even in corruption.

The government employees collect bribe taxes from citizens on many counts, some of which are presented in the Table. It is clear that the bribe tax collection is birth-to-death levy and, more important, is no longer considered improper.

An informal survey was done over the last three years in different parts of a city to get an idea of the type of bribe taxes and to estimate the amounts changing hands.

This, coupled with various news reports about graft cases/Lok Ayukta reports published in newspapers, was used to arrive at the bribe tax details. This does not cover large amounts of bribe taxes pertaining to major/minor projects both at the State and Central levels. Also, it should be noted that every bribe tax does not have a corresponding Government taxes. As mentioned earlier, only employees in tax collection/revenue, or regulatory departments can collect Government taxes, with receipts. Simultaneously, staff of these departments also collect bribe taxes that often also reduce the flow of actual taxes to Government.

It is estimated that for all categories, the revenue generated in one city on account of bribe taxes could be around Rs 3-5 crore a day. And this is only for those nodal points not directly involved in collecting Government taxes. Based on an average of 250 days of government activity, the annual bribe tax would be at least Rs 1,000 crore. At the national level of, for say 50 cities/towns (minimal estimate) it adds up to a whopping Rs 50,000 crore.

According to the

Economic Survey 2004-2005

, the combined tax receipts of the Central and State governments in 2003-2004 were Rs 4,15,642 crore. If we use the thumb rule that the taxes were under-collected up to 20 per cent (again, an under-estimate), then the actual taxes would have been Rs 5,19,552 crore. The difference of Rs 1,03,910 crore arises out of bribe tax reasons.

Putting the earlier estimate of Rs 50, 000 generated in all government activities plus this estimate of Rs 1,03,910 of bribe tax in the tax departments we get an estimate of Rs 1,53,910 as bribe taxes. This comes to more than six per cent of our national income.

This also implies that bribe taxes constitute nearly 40 per cent of those levied by the Central and State Governments. This is without taking into account the huge corporate transactions on contracts worth billions of rupees on airports, expressways, power plants, IT parks, Defence purchases, etc. If we add them all, the bribe tax collections would be at least 12 per cent of GDP, when the aggregate tax-to-GDP ratio is around 16 per cent.

This implies that on a bribe tax plus regular tax basis, our tax-GDP ratio is nearly 30 per cent which is highly comparable to many developed economies. We may conclude that our " effective tax rate" is around 30 per cent of our national income, which is twice what is shown as " nominal tax rate". Hence the chorus by Leftist economists that India is an under-taxed nation is an untenable theory, based only on regular taxes. In this case, several hundreds of miles separate reality and the Left experts. The bribe tax is one of the important reasons why a large number of posts in various government departments, are apparently auctioned to the highest bidder.

It is no secret that in many Departments like police, sales tax, land registration, etc., "critical" location postings need substantial payments to the political masters. Needless to add, bribe tax collections are done with the connivance and/or encouragement of the top political leaders, who get a large share. The important issue is the use of the humongous amount of bribe tax by the receivers. A substantial portion of the unorganised credit market is serviced by bribe tax amounts and the police is said to be emerging as major credit provider/collector in the unorganised trade and retail markets. This has far-reaching implications for civil society and the credit markets.

It is important that the Finance Minister recognises the bribe tax explicitly and reduces the regular taxes so that the misery index of citizens is minimised. Taking into account the bribe tax, our income-tax should be half of what it is today. He should internalise the age-old dictum that " government is not the solution but the problem" and work on dismantling this beast. Lower taxes, combined with smaller Government, will unleash entrepreneurial capability and achieve the objective of faster growth and productive employment generation. Needless to add it will also reduce the bribe tax.

Hence, the Finance Minister should start removing service taxes, the `traumatic" Fringe Benefit Tax and drastically reduce income-tax as the citizens are paying substantially in the form of bribe tax.

(The author is Professor of Finance, Indian Institute of Management-Bangalore, and can be contacted at vaidya@iimb.ernet.in. The views are personal and do not reflect that of his organisation.)

(This article was published in the Business Line print edition dated January 26, 2006)
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