“I found Rome a city of bricks, and left it a city of marble," said Caesar Augustus, the first Roman Emperor.
Caesar Augustus converted Rome from a republic to an empire. It's in his reign that the Roman world became free from large-scale conflicts and wars that led to a 200-year-long period of peace, stability, and prosperity, popularly known as the Pax Romana — from Augustus to Aurelius.
The Bible (King James Version) mentions, “And it came to pass in those days,” in Luke.2, Verse 1, “that there went out a decree from Caesar Augustus, that all the world should be taxed.”
Taxes and states have intertwined lives. They have happily lived in each other’s company for thousands of years. And in no way is India a stranger to this story. “It was only for the good of his subjects,” wrote Kalidas in Raghuvansh about King Dalip, “that he collected taxes from them, just as the Sun draws moisture from the Earth to give it back a thousandfold.” Taxes find a detailed mention in Manusmriti and are at the heart of Kautilya’s timeless political economy treatise: Arthashastra.
The Low Tax-GDP Ratio
A broad-based tax structure was prevalent in Ancient India. The collection of taxes was organised and a battery of officials worked to ensure that the glint of the amount collected from taxes remain the brightest in the revenue coffers of the state. “From the treasury,” wrote Kautilya, “comes the power of the government”. It’s strange, therefore, in many ways, to believe that with thousands of years of history and pedigree on the subject, India has a poor record on taxes even today.
The omnipresent assertion in India’s dialogue on low taxes is to blame the people for automatically not showing up to pay. The low tax-GDP ratio is the other actor to star in this show. Add to that the usual suspects: professionals. A perfect mix.
A Case of Apples and Oranges
Jagdish N. Bhagwati wrote an interesting book called Protectionism. It was published in 1988 by the MIT Press. In one of the footnotes, there is a little joke where an economist’s wife asks him, “Honey, do you love me?” To this, the economist says, “Relative to what?”
Our tax-GDP ratio is indeed low when we compare it to the OECD economies in their present shape. However, it’s not the case when we compare India’s figures with the numbers of these economies when they were at a similar stage of development.
India may be the sixth-largest economy in the world in GDP terms, but our position slips down to way below 100 when we compare India with other countries on a per-capita basis.
Taxes are paid by people having incomes. Hence, when it comes to the tax-GDP ratio, apples should not be compared with oranges. In a like-for-like comparison, India’s tax-GDP ratio looks decent when compared with countries having a similar per-capita. The problem, therefore, is not that we’re poor tax collectors. It is that we are poor.
India Is an Outlier in Terms of Tax Slabs
The argument that there are millions of people hiding somewhere without paying taxes also deserves an examination. In the current income tax structure, only individuals earning above Rs 5 lakh are required to pay income tax. India’s per-capita is around Rs 1.5 lakh. This translates to an average Indian earning less than a third of the minimum income required to pay income tax. India may not be an outlier in the tax-GDP ratio but it sure is one when it comes to tax slabs.
Most countries tax their citizens earning the average income of the country. India is an exception. The problem is exacerbated by the relentless raising of the income tax threshold over the years. India has raised the threshold more than a dozen times in the last three decades. This extraordinary exercise, over the years, has doggedly eroded our tax base. Economists estimate that only 3% of working Indians fall in the current income tax bracket. The generosity of our policymakers has made our taxable pie very small.
In countries that can be considered a benchmark for us, the citizens start paying income tax as soon as they cross the poverty line. The low tax rate of 5 per cent at the base level of the income tax slab is another Indian idiosyncrasy that has very few parallels in the world.
The rates start at a minimum of 10 per cent in countries whose tax-GDP ratios we aspire to achieve. The last in the line of fire are the professionals. They can speak for themselves and do not merit a defence in this piece.
The Richer You Are, the Better You Pay
“It ain't what you don't know that gets you into trouble,” said Mark Twain – “It’s what you know for sure that just ain't so.” India’s tax base will grow when India grows. India’s tax collections will grow when there are more Indians in the taxable basket.
A simple, serious, and sustained pursuit of economic growth is key to achieving the goal of more tax collection. The richer you are, the better you pay. This hypothesis can even be tested within India, and one will end up finding that the richer states emerge as clear winners in their ability to tax.
The solution, therefore, to India’s taxing problem is pretty simple: stable income tax threshold, fewer exemptions and significantly raising the income of our people through uninterrupted economic growth.
The Top-Down Empires Have Fallen
We have to create wealth creators. A school of thought that is in line with our ancient economic thinking. “In the absence of fruitful economic activity,” said Kautilya, “both current prosperity and future growth are in danger of destruction. A king can achieve the desired objectives and abundance of riches by undertaking productive economic activities.” There is a clear correlation between wealth creation, highlighted by the government of India’s Economic Survey for the year 2019-20, and the direct tax inflows for the government.
The India of today needs an outlook of today, a bottom-up game. The top-down empires have fallen and are biting the dust of irrelevance. If we continue to obsess ourselves with suspicion and play the taxing game of Alice in Blunderland, in which we try to find people who do not exist, there is no other place that we can reach except where we began: nowhere.
Tax reforms cannot work in isolation. It has to be wedded to the broader vision of the country's economic reforms. If we want to tax people, we must create people we can tax. This is in India’s national interest.
(Chandan Karmhe is a Chartered Accountant, law graduate, and an alumnus of IIM-Ahmedabad. This is an opinion article and the views expressed are the author's own. The Quint neither endorses nor is responsible for them.)