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Imagine No Taxes



At Pragati, I write: Imagine No Taxes.

Nitin Gadkari, former BJP president, is quoted by NDTV Profit saying that they’re considering a total abolition of income, sales and excise taxes. Instead, the government will institute a 1 percent to 1.5 perecent expenditure tax, and sell or auction assets like coal and oil blocks.

At first, the suggestion of a zero tax state sounds impossible. But there are those states that run without taxes, many of which are in the Middle East. Revenue can come from many sources, such as dividends from state owned companies, sales or auctions of assets, licence fees for certain businesses, and so on. There are obvious advantages to a zero tax regime. There is no need for income tax collection and the whole infrastructure behind it. The lack of taxes gives people more in their pockets to spend or save.

How could India do it? There are two ways to balance the budget, if you remove a large revenue item (taxes). You either replace that revenue with something else, or you cut expenses accordingly. Income tax earns Rs 6.6 trillion, and Customs, Service and Excise taxes earn Rs 5.65 trillion. Net of the states’ share taxes earn the Union Rs 8.9 trillion rupees. Replacing this is quite a challenge.

Some suggestions involve taxing transactions instead. The “Private Consumption” part of the GDP is about 60 percent, or about 60 trillion rupees;  if transactions add up to about this amount, a 1 percent transaction tax will give around Rs 600 billion (Rs 60,000 crores). Even if we push that up to Rs 1 trillion, that’s just 10 percent of revenue foregone that is replaced.

India could retain customs duties (for good imported) which are slated to raise Rs 1.8 trillion.

We could sell assets, like stakes in public sector banks, PSU entities and the Railways. And auction national assets like spectrum or coal and oil blocks. The figures being touted are ludicrous, such as Rs 24 trillion for coal and oil allocations; that amount is about 30 percent of the total amount of rupees in the country but it is quite likely we could raise, in the short term, around Rs 2 trillion by all these sales.

However, it is unlikely this is a long term sustainable measure. You can only sell assets as long as you have assets, and very quickly we’ll run out of things to sell. The nature of the beast is to use such asset sales to bridge the gap while expenses are cut down dramatically over the longer term.

How would we cut expenses? Let’s first analyse the government spending we do. The Indian Union government will spend over Rs 16 trillion this year, as in the budget. Of this, the biggest ticket non-capex items are defence, interest payments  and subsidies. We cannot do away with the first two.

With no tax collection, the cost of collecting taxes, maintaining employees on the payroll for ensuring paperwork is collated and collected is superfluous. So if those employees are removed, the corresponding costs can be lowered. This only yields about Rs 90 billion or Rs 9,000 cr though. A significant amount of time will be saved in terms of not having to file tax returns or defend the use of a few bills to an income tax officer.

And then, the government should begin to cut its functions to a fraction of its current operation, eliminating entire departments and ministries alike. We don’t really need a Ministry of Steel, a Ministry of Shipping, or a Ministry of Textiles – these should all come under a general commerce ministry.

The problem? You have that many jobless government employees. You have that many jobless chartered accountants and tax preparers. You have a significant amount of effort in getting these employees trained to do other jobs, and the cost of that will have to be borne, at least partially, by the government. There is the political challenge of facing the wrath of these people in the meantime.

And then, there’s the small point that even if everyone leaves a cushy government job peacefully, they still get a cushy government pension which the government will have to pay for anyhow. Without this substantial reduction in costs, the plan might not make a lot of sense.

We have decided to move to a General Sales and Service Tax (GST) regime, with each service or product with a fixed tax percentage. This revenue is shared between states and the Union. Even if the Union were to give up its own share, the states will demand theirs. Unless all states agree to move to a “smaller government” concept, states will need to revenue to pay their bills.

Lowering of subsidies is important, and not very popular. Cutting oil subsidies to zero (and raising oil prices correspondingly) and reducing the fertiliser and food subsidies can save us over Rs 3 trillion in a year. We should disband the Food Corporation of India (FCI) operations of buying at high prices from farmers which only provides “food insecurity”.

There is a medium term path to reach this noble goal. First, the idea should be to welcome more people in the taxable system, while reducing the friction involved in taxation. That can be achieved by lowering the marginal tax rate substantially – to as low as 10 percent for income taxes, as low as a 2 percent sales or excise tax while we plan to cut expenditure.

The lowering of government expenses will cut into GDP for a while. Government expenses are around 10 perecent of GDP, and the rest of the GDP will take a little time to catch up. But a low tax regime attracts investments both from India and abroad, so the longer term impact is definitely positive.

There is also a potential impact of dual tax avoidance treaties. A low-tax regime means your country can be used for laundering money, and every other country will want to rewrite their agreements with India.

Lowering taxes and removing subsidies will have both inflationary and disinflationary impacts. No subsidy of oil means a higher price for oil, but then a large chunk of the oil price is made of taxes, which will go away.

The concept of a smaller government and very low taxes might not be palatable to the public, who believe the government can lower market dictated prices by simply intervening in the market. Or that we can have, heaven forbid, private entities making profit. So the political damage of going down this route is very large, even if the economics dictates it is a more efficient method of growing our economy.  Even if it is achievable, can a government take that pain?


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