Looking merely at direct taxes, it is often suggested that India is an under-taxed nation. This, says R. Vaidyanathan, does not take into account the speed money paid for government service. This rent-seeking makes the nation high-taxed.
Advertisements are issued to induce people to pay taxes and novel schemes are suggested before every Budget to augment government revenues. One of the common arguments is based on the share of taxes to GDP and it is suggested that it can be much higher. Another is in terms of the composition of the taxes direct and indirect and it is suggested that the latter, which are regressive, are larger share of the pool.
Table 1 gives the share of taxes to GDP for select years from 1991. The share of taxes, both direct and indirect, has been around 15 per cent of GDP in the last decade and half. The share of indirect taxes was of the order of 11.5 per cent and that of direct taxes 3.6 per cent.
Based on this data of direct taxes to GDP of nearly 4 per cent, many experts, particularly of the Left persuasion, argue that we are a under-taxed nation from the view of the direct taxes. But, as we will show, they do not take in to account the payment to be made to government employees (variously called bribe, rent seeking, speed money, lubrication, etc.) for carrying on any activity and to that extent the total taxes are much higher than reflected.
Table 2 gives the level and composition of taxes of both Central and State governments in the last decade. A slight shift in the proportion of direct taxes from 1991 to 2003 is seen. It has gone up from 14 per cent of all taxes to nearly 24 per cent during this period when the proportion of the indirect taxes came down from 86 per cent to 76 per cent.
A substantial drop is seen in the Customs duties due to our international commitments. Excise duties declined from 28 per cent to 23 per cent during 1991 to 1996 and by a similar magnitude later. The share of personal income-tax showed an increase from 6.6 per cent to 9.9 per cent. As personal income-taxes and excise duties are shared with State governments, there is no enthusiasm for the Centre to reform them.
The aggregate taxes do not reveal the full picture of evasion and coverage. Table 3 provides the number of returns filed by salaried and non-salaried persons in 1999-2000 according to the I-T Department.
It says that there were no salaried persons earning more than Rs 1 crore annually and in all only 200 persons above Rs 25-lakh. In the case of self-employed, the number is around 900 in the Rs 25-lakh category with none in the Rs 50-100-lakh category.
From Table-3, it looks as if a relief fund should be created for all our top film-stars, cricket players, surgeons, lawyers, chartered accountants, architects, tax consultants and other self-employed persons. They all seem to be in distress!
Table 4 provides the number of returns from some categories of services as published by the I-T Department. The numbers speak volumes about the coverage and the nature of underlying collections.
The whole country there are apparently only 10,539 utensil and 5477 furniture shops in the taxable category. Pinch yourself.
Immediately the argument will be to strengthen, enhance, improve and network the I-T Department. The issue is not that. It is much more serious and cancerous. If you visit the Postal Department officers' quarters in, say, Mumbai you will find mostly cycles and scooters.
But if you visit the residential quarters of the staff of Direct or Indirect Tax Department, you may find expensive cars parked there. That should provide clues to the issues facing us.
At the same time we find that the income of government employees rising faster than the inflation rate in the last thirty years.
Table 5 provides the increase in salaries of public sector employees in relation to inflation. The emoluments have risen 3610 per cent from 1971-72 to 2000-01 when the Consumer Price Index climbed 1440 per cent. This implies the public sector employees are net gainers with their real income well protected.
Hence decline in the real income cannot be a reason, if at all it is justifiable, for rent seeking from ordinary citizens.
The pension benefits of government employees are one of the best in the world since they are inflation indexed, commutable and family security included.
If you have been employed with in the World Bank/IMF or the UN, then the pension, in US dollars, is not even taxed. Hence lack of social security at the time of retirement cannot be a complaint for government employees.
Another related issue is the numbers of hours of "effective work" put in by the government employees, particularly at the lower levels.
It is surmised that on any day in many government offices, effectively two hours are spent on real work. It implies that the emoluments are for 10 hours of work per week, which is much lower than even the European standards of 30-35 hours.
The important issue is the "Own Account" collection (variously referred to as bribes, corruption, speed-money, grease, rent-seeking, etc.) and that on "Client Account," namely the government.
This "Own Account" collection coupled with the "Client Account" collection (regular taxes) constitute a large percentage of the National Income and from that perspective we are a highly-taxed nation.
We will see in the next instalment the estimate of "Own Account" collection in our context and implications thereon.
(The author is Professor of Finance and Control, Indian Institute of Management-Bangalore, and can be contacted at firstname.lastname@example.org. The views are personal and do not reflect that of his organisation.)