Many years ago, at an inter-collegiate contest, I wrote an essay on ‘If I were the Finance Minister of India.’
I wrote that the Income Tax Act must be dumped into the Thames; lock, stock and barrel (those days, nobody called you anti-national if you didn’t quote the Ganges). I wouldn’t say I liked taxation as a subject in college. My essay reflected it. I suggested that India should tax “spending” and I called it “spending tax.” I did not have an item called indirect taxation, so maybe I hadn’t begun hating it yet.
I wrote, “businesspeople create jobs and it is good enough for the country. Employees slog for companies and it is bad enough for them.” I wrote about the canons of taxation. I loved economics and fancied that one day I would be the finance minister. Nobody, myself included, understood my essay! A jury member liked my piece, fought for it and thanks to her, I won the first prize.
Years later, the sitting finance minister has surprised. At the risk of being dubbed anti-Modi, let me point out a few things.
The decision to do away with the dividend distribution tax is bizarre. It was perhaps one of the most elegant pieces of legislation since the arrival of the IT Act in 1961. I will tell you why. It met one of Adam Smith’s four canons of taxation, namely convenience and was also in line with ideas in behavioral finance.
The famous economist had argued that taxes must be convenient to collect and easy to pay. Now imagine a company has 100,000 shareholders. Tell me which is more straightforward: to raise the dividend tax from 100,000 shareholders; or to collect it from one entity, namely the company. Anybody will tell you that it is the latter. Dividend distribution tax (DDT) goes to reduce the reserves. The reserves belong to the shareholders. So indirectly, they pay out without feeling the pinch. In short, it was easy to pay and was so in line with the ideas of behavioral tax. Now when you push the tax on to the shareholders, they will feel the pinch of charge. To collect it from them even if it is through a TDS hardly makes sense. It means more paperwork. If you say that in today’s world of technology, it’s easy to do so, I would still ask why to do it, if there is no apparent benefit.
Let’s take up another of Nirmala’s ideas: the creation of two parallel rates of tax and, therefore, two sets of taxpayers. If you wanted to eliminate all allowances, by all means, do that. After all, the days of targetted savings and consumptions are over. But to remove the saving element, namely the 80C and 80D parts, is clearly sad. As it is, India is shifting from being a saving to a spending economy. To accelerate that process does not make sense. Like someone pointed, you may be willing to forego Rs 50,000 of tax to get the extra cash flow, which comes in because you are not making those investments. Personally, I would have liked to see tax investments stay on the radar. Also, at a time when the government is screaming hoarse about one nation, one tax, one law, why have two classes of taxpayers? Perhaps only Sitharaman can answer that.
I like this idea of disinvestment, although it might be hard to imagine India minus LIC. I believe that governments must be in the business of governance and not in the management of the business. They must restrict themselves to law and order, primary education, foreign affairs, and defence and throw the rest to private players. I also like the idea of Sitharaman that, over the long term, she would do away with all allowances and concessions. I would like that in the medium term, she does away with all the grants and rebates to parliamentarians, both MLAs and MPs. Let them begin by paying a toll on roads, paying full fare on trains and flights and paying tax on their income, including perquisites.
Getting back to my essay at college, I had also suggested that every Indian citizen, namely passport holder, should pay tax at 5 per cent of his earning beyond a threshold limit. I initially celebrated the finance minister’s announcement, but the clarification that came in later stopped me.