Tax administration and corruption

April 27th, 2011

The comments on my last blog made me realise that by and large people have lost all faith in the system of governance. The government in India has three pillars, the Parliament (politicians), the Executive (bureaucracy) and the Judiciary. There is no doubt that the credibility of the first two is at an all time low. We now look forward to the judiciary to instil some credibility into the system. In such times, when the trust quotient of the government is running negative, it becomes very difficult for people to appreciate the welfare state and the Nordic model. Hence I have decided to shift focus on to the issue of corruption. Anna Hazare is the flavour of the season and I have no reason to stay away from it.

Once we start discussing corruption in the system of taxation in India, interesting issues emerge. There is corruption at the point levy (i.e. policy formulation) and collection and there is the obvious case of corruption at the level of application of the tax collected. Hence this issue needs to be addressed from the perspective of the taxpayer, the tax collector and the government as a whole. The taxpayer blames the tax administration for corruption, the administration blames the taxpayer and the politician blames the collusion of the taxpayer and the administration for the corruption. In this conundrum, it becomes difficult to arrive at a fair conclusion.

Let us first look at the issues of corruption at the point of levy. This means that the policy formulation is influenced so that undue advantages accrue to a particular lobby. This is one of the most common forms of corruption but is difficult to practice and hence difficult to pinpoint. The 2G scam is a good example of this kind of corruption. This is practiced by the learned and is beyond the understanding of an average tax payer. One needs in depth knowledge of the law for both impacting and also scrutinising policy formulation to catch such a form of corruption.

The above is also the worst kind of corruption. India has numerous examples where the tax policy has been influenced in order to favour a particular section and there is no record of the money lost due to the faulty policy formulation. But unfortunately such instances have never caught the public scrutiny. These result from an unholy nexus where the taxpayer initiates, the bureaucracy endorses and the legislature accepts and formulates the law.
And of course (to achieve success in the above), as we now learn there has to be substantial doses of the Page 3 person who enjoys celebrity status and plays the role of the catalyst and does nothing else in his (or hers!!, of late I have been a little confused about the gender of the catalyst) life.

The author is a practising chartered accountant specialising in tax consultancy, and is a visiting faculty at various B-schools in India and abroad

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Case for increasing tax rates in India

April 18th, 2011

Come February every year and India is abuzz with the talk that this Budget, tax rates should be lowered. I fail to understand this obsession with lowering taxes.  Is there a real case for decreasing tax rates or it is pure rhetoric?

It is interesting to analyse the tax rates in different countries and compare them with India.  It is amazing to note that all the developed nations have tax rates that are much higher than those in India. In the whole of Western Europe, the highest rate of individual income tax is in excess of 41%. In fact in Denmark, Sweden and the Netherlands, it is in excess of 51%.  In Asia most nations have a highest tax rate in excess of 30%. It is only in Latin America that the rates are more or less in line with India.

Among all the nations across the world the highest tax rates are in Sweden – 56%, followed by Denmark - 54% (in 2009 this was 62%) and the Netherlands - 52%.

The countries with the highest tax rates are the Nordic countries with a strong tradition of high tax and comprehensive welfare state. They also rank highly in terms of life expectancy and quality of life. On average, the Nordic countries outperform the globe on most measures of economic performance. Poverty rates are much lower there, and national income per working-age population is on average higher. Unemployment rates are roughly the same in both groups, just slightly higher in the Nordic countries. The budget situation is stronger in the Nordic group, with larger surpluses as a share of GDP. The Nordic countries maintain their dynamism despite high taxation in several ways. Most important, they spend lavishly on research and development and higher education. 

The above brings us to another basic question: What is the relationship between high tax rates and welfare measures and economic prosperity?

If one is to go by the Nordic model, the relationship becomes clearly established – the nations that provide the highest amount of public services including social sector benefits are the ones where tax rates are the highest. This is simple logic and does not require a great knowledge of economics. Taxes are the only method by which the governments approach the difficult task of raising resources for funding the necessary public services.

So it means that – increase tax rates but give me good administration, a safe environment, an efficient fire brigade, affordable health and education facilities ………..Oh my god!!
I am ready to pay anything to get these in return.

The author is a practising chartered accountant specialising in tax consultancy, and is a visiting faculty at various B-schools in India and abroad

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