We Need Tax Breaks, PM Modi, Not Pious Statements

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n the 1988 presidential election, George Bush Senior was handed a winning slogan by his speech-writer Peggy Noonan. In rally after rally, he would point to his mouth and say “Read my lips, no new taxes.” If he had fought the elections right now, when the US economy has been infected by COVID-19, he might have needed a more radical slogan – something like “Read my lips, no taxes. Period.”

In fact, consumers in every economy in the world need tax breaks. So, when PM Modi said he was going to reward the honest taxpayer, what one was hoping for was mid-year tax cuts. Instead, what we got was more transparency in the taxation system. That’s good, no quarrel. From next month, taxation will become fully faceless. The tax official won’t know who the taxpayer is or where she is from. And taxpayers won’t know who is assessing their tax returns.

Of course, ‘faceless taxation’ is a crucial reform. Now, you won’t suddenly have a tax official asking you to turn up with your IT returns and documents from five years ago. They won’t be able to scare you into coughing up extra cash to paper over some minor transgression. The reverse is also true. Wealthy and influential tax-evaders will not be able to threaten honest officers with punishment transfers, or bribe the not-so-honest to get away with tax chori. And even if tax babus use Indian jugaad to game this anonymous system, corruption will still decrease.

But here’s the thing: tax terrorism is not just about corruption or unwieldy tax laws. It is most often collateral damage caused by unrealistic tax collection targets set by the government. If the centre’s budget projects that direct taxes will grow by 10 percent, whereas incomes grow by just 5 percent, it is inevitable that tax collections will fall. It is equally inevitable that the income tax department will be pressured to deliver by issuing notices to all and sundry.

Officials will try to prove to their bosses how diligent they are in collecting taxes. Arcane laws will be fished out of the tax books to send notices to individuals and companies. We have seen how the notorious ‘Angel Tax’ was used by over-eager taxmen and how it paralysed operations in startups across the country. It is also true that when officials are under pressure, they file tax cases. They do it even though the tax department’s record at the courts is abysmal. As the Economic Survey of 2017-18 showed, the IT department lost 87 percent of direct tax cases in High Courts and 73 percent in the Supreme Court.

You could say that the Modi government is already trying to tackle this through the Direct Tax Vivaad se Vishwas Bill 2020 which says that people can settle their tax cases by paying what the IT department has demanded. They won’t have to pay penalties and interest. However, tax experts say this is not a solution for those who honestly believe that the tax demands are unfair. Mostly, disputes arise out of interpretation of tax laws, which some say are cumbersome and need to be simplified.

PM Modi has promised to do that. In fact, he says, many complicated laws have already been simplified. The trouble, as one tax officer wrote recently, is that tax laws often become even more complex when lawmakers try to simplify them. Taxes are about money and only fools can be parted from it easily. So each simplified new law leads to litigation, which leads to amendments – and the law book ends up becoming even bulkier. He gives the example of the UK’s new Income Tax Act, implemented in 2007, which was supposed to make things simpler. The Act has 1038 sections, where the ‘complex’ one it replaces had 845.

Simplifying taxes and making the system more transparent is welcome, but it is similar to climbing the Global Ease of Doing Business rankings. As the PM reminded us today, India’s rank has shot up under him. But has that led to more businesses registering? Have we seen a sudden jump in entrepreneurship and industrial production? The Modi government’s record shows the exact opposite. Pious statements aren’t good enough when the economy is tanking.

From the RBI to Narayana Murthy, everyone is predicting the worst year for our GDP. Companies are seeing their revenues contract. They are being forced to cut back on investments, reduce expenditure, and downsize. The downstream impact of these cost-cutting measures is to reduce the overall demand in the economy. As incomes drop, household consumption is drying up. At a time like this, tax cuts are a crucial instrument to help families sustain their consumption levels. Tax cuts are also needed for small entrepreneurs and distressed companies to deal with the economic crisis. And it’s not just direct taxes but also GST and taxes on fuel which make up a key part of their costs.

You might ask, if the government cuts tax rates, where will it get the money to run the country and boost the economy? As many economists have argued, the only way out right now is to let the fiscal deficit increase. It is not an ideal solution, but there’s no other way out. India’s economy was already facing a massive shortage of demand well before the coronavirus hit us. COVID-19 has made it much worse. Even upper middle class and affluent families are consuming less and saving more because of the economic uncertainty ahead. These people account for the bulk of the income tax collected in the country. If the Modi government is really serious about honouring these honest tax payers, then it needs to give them a break.

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