The Government needs to proactively create the culture of paying taxes in order to be able to fulfil the dream of us becoming a $5 trillion economy in five years
The Indian Government aspires to take the economy to the $5 trillion level over the next five years. It is a difficult goal by its own admission but not an impossible one. Given the current economic slowdown, many experts had hoped for a much stronger fiscal stimulus than what is contained in the recent Union Budget. That being what it is, some experts believe that the Government has missed an opportunity. However, the Centre seems to think differently. While acknowledging the need for growth-enhancing measures, the Niti Aayog’s Vice-Chairman, Rajiv Kumar, had hinted prior to the Budget on using “alternate” measures in the face of limited fiscal headroom. Subsequently, the Reserve Bank of India (RBI), in its monetary policy, used unconventional tools to give the economy a shot in the arm. Without getting into the debate on what’s an optimal dose of economic stimulus and what combination of fiscal and monetary policy could deliver it, Government spending does have an important role in the revival of the economy. The Centre believes that a decent dose of fiscal stimulus is already contained in the Budget.
Be that as it may, growth revival is closely tied to Government spending, which in turn is closely tied to revenues and taxes are an important source of it.
It is startling to note some income tax statistics that have recently been cited: That only 8,600 individuals have reported incomes above Rs 5 crore and only 2,200 professionals (doctors, chartered accountants, lawyers and so on) have declared professional income above Rs 1 crore in the entire country in the fiscal year 2018-19. These figures don’t match well with some other statistics, such as the number of premium cars sold or the total people travelling abroad. There seems to be significant scope for improving tax compliance, which is essential to India achieving its $5 trillion goal.
No rationale for tax avoidance: Tax evasion or underreporting may have been justified when corruption in public administration ran high. But now that the Narendra Modi Government has been able to provide a cleaner administration, this justification is no longer valid.
Further, the taxpayers can be reasonably certain that their money is being used responsibly. Indeed, the Modi Government has a vision of creating a “New India” and is focussed on the economic development of the entire country.
The Government’s focus on the development of the North-east region, on “aspirational” districts and on Tier-1 and Tier-2 cities is all aimed at unleashing economic development across the entire country. Furthermore, several policies and programmes such as Skill India, Mudra Yojana, Start-up India, doubling of farmers’ income with the promotion of agriculture and allied activities such as animal husbandry and so on are aimed at benefiting all sections of society.
Additionally, the Government is working towards ease of paying taxes. It is simplifying the taxation system and making it citizen-centric. It has taken or is taking several steps such as simplifying laws, reducing the tax burden, making tax assessment faceless, bringing taxpayers’ charter and so forth that should instil trust and confidence among tax-payers. But trust and confidence alone are not sufficient to persuade people to pay taxes honestly. The culture of tax avoidance developed over the last few decades will need to be changed consciously.
Promote tax-paying culture: The Government needs to promote the culture of paying taxes in the country. This can be done through a combination of measures. First, the example of clean administration at the national level needs to percolate down to the sub-national level too. Second, it’s not enough for the Prime Minister or Chief Ministers to be clean. Every Minister as an individual tax-payer ought to set an example. Third, the Government needs to run media campaigns to inform the public of their civic duty and also to connect the dots transparently on how their taxes are contributing towards nation-building. Fourth, the Government needs to rope in popular personalities with a large fan following to drive home the message of paying taxes — pretty much the same way as it has been doing for some other social campaigns. The culture of paying taxes honestly has to be instilled consciously and pro-actively.
India has a rich tradition of people donating to social organisations involved in helping the needy. However, in a well-functioning system, the Government, through its various programmes and initiatives, ought to be taking care of the needy. Although people are free to continue giving private donations, they don’t necessarily have to, as long as they are paying their taxes and holding their Government accountable for its performance, including its welfare role.
Tax culture essential: India is considered to be a lower-middle income country as per the World Bank’s country classification which is based on income per person. Even if India becomes a $5 trillion economy by 2025, it would still be considered as a lower-middle income country as per the World Bank classification.
The changes in the taxation system that the Government has or is introducing can help it generate revenues to fuel economic growth. Achieving a $5 trillion economy in the next few years is not difficult. India may take a year or two longer but the goal is within reach.
However, to become a truly developed economy, India will need to change the mindset of its people. It will have to consciously and proactively create the culture of paying taxes.
(Ahuja is a development economist formerly with the World Bank and Pradhan is advisor and adjunct professor, Chitkara University, Punjab)
