By all accounts, another quick-fix solution to India’s fiscal consolidation problem is in the offing. It is no secret that for the past many years, the gap between government revenue and expenditure has increased spectacularly. After borrowing heavily from markets, the Union government now wants to try another “solution”: raising income tax on the “super rich”. It is unlikely to work. India has learned the hard way that raising tax rates does not lead to higher revenue and only results in difficulties in collection. And this is just one problem: if the years of growth have not led to lasting revenue buoyancy, surely raising tax rates will not solve the problem.
There is undoubtedly a pressing need to raise revenues, but the right way to do that is to increase compliance and spreading the tax base, rather than milking the middle class at will—the least resistant services class to be more precise. For example, the government has shown little will to increase the tax base by netting the self-employed “rich”. Today, there is plenty of data about consumption patterns ranging from high cellphone bills to purchases of automobiles that can be used to find individuals who do not pay tax or evade it. In addition, chasing black money sloshing around in the economy and getting channelled into unproductive sectors such as real estate can be a fruitful option.
These options, however, require some will and this government has a shortage of that commodity. Further, if the government is serious about addressing the revenue side of the budget, it should get back to the direct taxes code (DTC), focus on issues raised by various parties and make way for its early implementation. The same holds true for the goods and services tax (GST), where virtually no progress is visible.
To be sure, revenue is only one part of the story. The real problem is that government expenditure has just gone out of hand, and until that is brought under control, raising tax rates will not serve the purpose. Again, the grand idea of redistribution the United Progressive Alliance government adopted, especially in its second term, has reached its natural limit as it did some three decades ago. No matter how well you cut the pie, it is not sufficient to serve the needs of all Indians. The only option is to increase the size of the pie and that will happen only through growth.
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