Chennai, February 17, 2018

India needs more tax payers. Countries where people paid more income taxes are ones that developed for various reasons.

The relationship between State and the people completely change, said the Government of  India's Chief Economic Advisor Arvind Subramanian.

If India needs to increase both tax GDP and the number of people paying taxes, there should be voluntary compliance. People are willing to  pay, if they feel they are getting more for money. That’s where delivery of services is more important. There is no doubt that better the delivery, more the compliance would be, he said in a talk  on Union Budget 2018-19 moderated by author and economist VA Nageswaran and organised by the Chennai International Centre.

It is important to induce tax compliance through carrots rather than sticks. The Government is very mindful of this. In the Union Budget 2018-19, there were many other things announced for middle class. It is not that Government had ignored middle class.  It is an obsession in the Government to make it easy for tax payers, he said.

China has many more I-T payers than India. They achieved this by setting a threshold at some point in time, and they sat on that threshold and allowed natural income of people to grow, and then come in to tax haven. It is a remarkable policy by stealth. “You don’t do anything, and get more tax payers. However, if you keep raising threshold, you will be doing the opposite, and people will be falling off the tax net. This, in the long run is not good for the country,” he said.

To be fair to India and to policy making in India, compliance is a much more complicated problem than people realise. Looking at taxation in advanced economies like US and Western Europe, the government there first provided essential public services like roads. Once they acquired legitimacy in doing that, it is only then income distribution became important role in policy.

“Yes, people said, you are taking my money and giving it to someone. But, I am willing to do that because you are doing everything else for me. India, unfortunately, did not have that  liberty because ‘we started as a democracy, and we always had to redistribute. Indian state is in a quandary having to redistribute without having acquired the trust that it also provides services. How we get out of this, it is a difficult challenge. We have to do more and more,” he said.

Tax compliance is not only an issue for the Centre but also for States that don’t collect enough taxes even relative to powers they have. People are not willing to pay. It is a vicious circle, he said.

On his views as to why every time during Union Budget the middle class thinks that I-T exemption limit should go up? Subramanian said, “I have a very strong view on this. We talk about middle class. However, tax payer at lowest threshold is in the top 5-6 per cent of income distribution. So the notion that tax middle is a little bid odd. Tax payers in India are among the highest percentage of income and wealth distribution population.”

[The Hindu Business Line]