Economy

Taxing times: Don’t flog the middle-class taxpayer

Updated : January 21, 2020 02:13 PM IST

The zeal to get more people to pay tax and to punish evaders is better directed towards expanding incomes and employment.

Even on a purchasing-power-parity basis, an Indian earns far lesser than his brothers and sisters in most other parts of the world.

One of my early lessons on economics was about the factors of production — money (capital), material (land), manpower (labour) and management expertise (entrepreneurship) — or the 4Ms. What we were also told repeatedly about the Indian economy was that we lacked money or financial resources, but had an abundance of manpower. Unfortunately, the one key resource we have is being inadequately harnessed and deployed. More bluntly, our demographic dividend is fast turning into a demographic nightmare — with rising unemployment and declining household savings.

We have done little to harness our biggest resource, despite much talk of skill development and enhancing employability.

Did you know that India scores very poorly versus other nations on the education levels of our workforce—India’s adult literacy rate at a tad over 74 percent is way below the world average of over 86 percent and our share of labour with advanced education at under 60 percent is a far cry from Vietnam’s over 88 percent. This makes our workforce less productive.

What is even more startling is that India’s claim of unemployment levels seems masked by the huge share of self-employed to total workforce at 78 percent and the high ratio of rural population at 66 percent — we are all aware of disguised unemployment in farming. What this suggests is that India has a large number of globally uncompetitive micro, small and medium enterprises that more than likely do not add as much economic value as possible with better organisation of their collective resources. In other words, for example in sectors like toys, where local makers have been driven out of business by cost-competitive Chinese imports, a focus on attracting capital to set up facilities of scale could tilt the balance. So, too in all other sectors to make India globally competitive and a net exporter to the world.

What India needs is more organised, competitive businesses. A move to scale businesses will not only generate more employment and economic value add but also bring more of the workforce into the mainstream and help in widening the tax net. Can you imagine what will happen to the income tax base if half the so-called “self-employed” move to the “wage and salary earner” category?

And here the big regret is India’s inability to cash in on the China rebalancing opportunity, unlike what Vietnam and even Bangladesh have achieved.

What India needs is a strong focus on attracting capital to generate more productive employment for a better-skilled workforce. People are what we have, and plenty of them. And the quality of Indian minds is now well recognised, with a large swathe of global corporations being led by Indians and more and more Indians being promoted to high public offices across the world. It is this inherent talent that needs harnessing, and we don’t have the resources to do so, therefore we need to attract more of it. To give you an indication of just one factor, the amount of land available per Indian is far less than for a citizen of almost any other country in the world.

But coming back to the subject of taxes, what needs to be kept in mind is that even on a purchasing-power-parity (PPP) basis, an Indian earns far lesser than his brothers and sisters in most other parts of the world, and the tax to GDP ratio needs to be viewed in this context. Of course, this must increase, but before we ask for more taxes let’s focus on increasing the incomes. Once incomes go up and the economy formalises, tax collections are bound to rise.

In this context, it would seem that the tremendous efforts being directed towards getting existing taxpayers (both direct and GST) to cough up more money for the exchequer, while merited in case of evasions, might have been more productively directed at attracting investments into the economy to drive growth. With greater prosperity comes greater propensity to give back, and that is what India needs today. Not a call from the taxman — because an individual’s computation doesn’t tally with that of the department or to declare some earlier income on the promise of amnesty.

Taxing times: Don’t flog the middle-class taxpayer

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