Tax reforms can help revive the economy

Indian GDP growth has slowed to a six-year low of 4.5 per cent in the July-September quarter, and leading indicators like imports and exports, capital goods and electricity consumption show signs of a severe economic slowdown. The crises in the banking sector, compounded by the slowdown in other key sectors, calls for serious introspection and corrective measures.

The government has been receptive to suggestions and a slew of initiatives have been announced over the last months. Some of these measures are welcome, but much more needs to be done; first, the extent of the problem must be accepted.

Tax structure to blame

A common action during any slowdown is the urge to raise taxes and blame any recent economic changes.

In fact, the GST, albeit with many compromises, still remains the best and boldest step taken by the government in recent years. Its implementation, in hindsight, could have been better, as the legislation did not take into account the innovative ways that rogue taxpayers can find to cheat on taxes. The recent spurt in revenue with the introduction of FASTags in the national highway system only goes to show the continued high instance of tax evasion in the system. Invoice matching is long overdue, and needs to be implemented on a war footing to curb GST leakages.

On the other hand, increasing GST rates — as some people are suggesting — will be a recipe for further disaster in a negative economic environment.

If one looks at two industries that are the most impacted — automotive and real estate — the tax structure is one of the major reasons for the current slowdown. The GST on cars and two-wheelers in India is applicable between 12 per cent and 28 per cent, though the latter is the prevalent rate on most personal and commercial vehicles. However, the GST is not the only tax applicable, as a compensation cess of up to 22 per cent is levied on certain segments in addition to the 28 per cent rate. Add to this the RTO tax, road tax, registration fees. etc. Thus, the total tax incidence on cars after GST introduction can be as high as 50 per cent. This implies that for a vehicle with an ex-factory price of ₹5 lakh, the consumer is shelling out at least ₹10 lakh, if not more.

Similarly, if we look at the real estate sector, a home-buyer is subjected to multiple taxes, including GST, stamp duty, registration, TDS, etc,, as well as the additional recurring annual property tax and corruption costs. Also, when one intends to capitalise the investment in real estate, there is imposition of an income tax, capital gain tax, etc. On a house worth ₹50 lakh, the home-buyer must pay an additional ₹12-15 lakh in the form of various taxes.

This is partially responsible for a situation where finished housing supply is equal to around four years of inventory in key Indian cities. To put in another perspective, no more construction is needed for the next four years, simply due to the need to exhaust the current inventory.

In September, with a view to boost investment and transform India into a “manufacturing hub”, the Finance Minister announced that corporate tax rate will be cut from 30 per cent to 22 per cent without exemptions. Overall, it’s a very bold move, but one which can further constrain the difficult revenue situation unless there is growth in consumption.

The rise in financial uncertainty, professional insecurity and the high-tax regime are the reasons for people to postpone their purchase decisions. In the current scenario, most buyers prefer to maintain status quo. If they are renting an apartment, they opt not to buy a house, and those owning a house are hesitant to upgrade. Only a handful are looking to make an investment in real estate. Despite there being several options available from finance companies and builders themselves, there is a slowdown in real estate consumption, which is evident from various reports highlighting unsold inventories.

Widen scope

Over the years, governments have focussed on increasing tax revenues only through the existing taxpayers. However, it is also imperative to focus on widening the scope of taxpayers. In a country with a population of over 1.35 billion people, there were only around 8.45 crore taxpayers in 2018-19. A large section of India’s population (nearly 58 per cent) which is associated with agriculture enjoys exemption of tax from agricultural income. Agriculture has been portrayed as a troubled sector for a variety of reasons. Dependency on natural resources, declining land holdings, cost of production and cartelisation of produce purchase are some of the factors impacting the sector and overall livelihood of farmers. But, does this imply that no farmer across the country is profitable or generating a decent income?

Nearly 70 crore people are non-taxable. The government should decide on a threshold for agriculture income and bring it under the tax regime. For example, agricultural income of over ₹10 lakh should be made taxable. In addition, all agriculture owners with income above a certain threshold should file returns like salaried payers. This will significantly decrease leakages coming from over-reporting of agriculture income as well as widen the taxpayer base.

All agriculture subsidies like fertilisers and seeds need to move to a direct benefit transfer system rather than the current highly inefficient and corrupt system with distortions at every level.

The over-burdening of taxes on a select few has eventually decelerated consumption, leading to the slowdown in the economy, job creation and new investments.

Plug leakages

Another major area to focus on to increase revenue is the curbing of widespread leakages in imports. Consumption figures in India are grossly under-reported, as import values are understated to avoid duties. This has a cascading effect as it impacts GST revenues when these goods flow through the distribution channel in India. This large-scale evasion of import duties, mostly on traded consumer goods coming through China and the Middle East, needs to be plugged to increase tax revenues and protect the domestic industry which is playing by the rules.

Demonetisation was an attempt to plug the leakages from the parallel economy but this has not been able to dent the widespread evasion in under-reporting of import values in certain sectors. The government needs to use modern technology tools and big data analysis, which can detect evasion without being obtrusive or hurting genuine business transactions.

If the government wants to increase revenue, they should have a near uniform moderate taxation for all categories of citizens above a certain income and minimise leakages through the use of technology. This will lead to higher disposable income for the honest taxpayer, leading to higher consumption and an improved economy. Unless the minority taxpayers are not unburdened with taxes, the GDP and the economy will continue to report slowdowns quarter after quarter.

The writer is Past Chairman, CII Western Region

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