Waxing Tax Too

In response to Friday evening post, one of my left-leaning intellectual (tautology, really!) friends called me for a not-so-quick tete-a-tete. Though certainly short of acrimony, the censorious tone of this conversation was hard to miss. The upshot of the lesson in economic history - or indeed its trigger - lay in how my blog piece in question had seemingly glossed over the Black Economy of India (emphasis as supplied), the continued advance of this Public Enemy Number One, and the calamitous consequences thereof. In other words, direct taxation reform was a condemnable (the word bourgeois was carefully avoided) distraction.

Frankly, this set me thinking. It does not require Keynesian genius to deduce skews in any economic structure hampered by the presence of an illegal economy. The news gets worse if this parallel economy breasts the tape at one-fifth the total as ours arguably does. So how does this work? In simple terms high preponderance and resultant cultural acceptance make such an economy difficult to unravel. Again, unfettered access to markets minus the burden of tax makes its cash transactions cheaper. The consequently uncompetitive legal economy thence loses marketshare, profit, and investible surplus. Clogging growth implies less employment and more pressure on government – more so in a regime of floundering tax collections. Need to shore up revenues to fund government spending pushes tax rates north, potentially incentivizing further tax evasion and hence growth of the illegal economy.

So far so good (or bad), in theory. In our case, one could well retrace the path to the days we made our ‘tryst with destiny’. Illegal economic activity had mushroomed in the run-up to independence, typical of wartime economics across centuries, and got a further boost with post 1947 nation-building economic action. Again, the Nehruvian model was resource hungry – revenue had to fund substantial public sector investments. The result was aggressive taxation coupled with a maze of incentives ostensibly put in place to foster savings. The fledgling Indian state just did not have the wherewithal to overcome the resultant tax administration challenges.

As it turned out, the next few decades saw a pronounced socialistic tilt in our policy. The consequent license raj added further question-marks around intent, to a tax regime with already suspect capabilities. While profiteering via artificial supply imbalances had been around for years, under the quota-permit system, policy formulation as well as enforcement became tools for malfeasance. (This in fact stays the biggest reason for celebrating the open-door approach in Direct Tax Code reform in my last post.)

Be these as it may, the most potent constituent of the parallel economy was the hawala-hundi system that allowed its ill-gotten gains to find their way to safe havens as much as to become a tool to finance new trades – and eventually, politics. Hence, even as the formal economy was constrained with pricing, taxation, forex and current/ capital account convertibility restrictions, enormous money transfers via the illegal market became a fact of life. If cash was in play as input or output (and what nefarious purpose doesn’t do both!) the answer in form of this high velocity-instant speed-currency agnostic money system became the oil greasing the Black Economy.

As various studies humiliatingly point out, the endemic corruption bred by such an all-pervasive Black Economy can sap individual will away. One does not need to conduct a Buddha’s Three Questions type of experiment to know that it is well-nigh impossible to go without cash (is king!) in life if registering a property, selling your car, or even making sundry household expenses. When the PM-in-waiting laments distribution losses, one sits up and takes notice!

Whither the disconnect with my more learned friend, one may ask. It lies in the essentially populist, two-dimensional corrective action he and his ilk typically advocate. Increasing taxes and duties changes the risk-reward equation making evasion more lucrative; adding legislative muscle to our inefficient executive breeds more corruption; and expecting a proletariat revolution to solve world hunger is, frankly, far-fetched.

So whence the solution? There must be many (only followers of Marx have the liberty to merely preach symptoms without offering a meaningful cure!) and for today, let me merely place the Korea model (if one plug be allowed) for consideration. This involves a large-scale and comprehensive adoption of cards as the sole payment mechanism for multitude of transactions (over a ceiling value, potentially) for individuals. Being electronic, on transaction speed and high-velocity rotations, credit/ debit cards can easily counter the ‘good’ in the Black Economy value-proposition. With increasing computerization, e-banking can work well in tandem with such a payment system, also addressing the Government’s benefit end-user discovery issue. The data explosion thus generated would do wonders for risk mitigation for any self-respecting funding institution – also helping buyer and seller price credit right. The government could use this information to plug tax evasion at lower cost, greater accuracy, and faster speed. And if a clincher was needed, for a terrorism frontline state as ours, one can well imagine the internal security benefits from better enforcement.

But, better not to stretch my ‘one plug’ luck too much, even for the hand that feeds etc!

Waxing Tax

Earlier this month, the Government of India placed a paper on a new Direct Taxation Code in the public domain for discussion. Such progressive procedure is as uncommon as it is laudable in a nation where administrative opaqueness has often been used to create latitude for backroom manoeuvering. In fact, the play in influence-peddling is believed to be so potent and widespread (so difficult to miss in Dilli's flaunt-it-if-have-it culture) that subterfuge of this kind is not merely accepted but expected. Drawing inspiration from the fortunes of sundry such power-broking carpetbaggers, if no other reason, it is incumbent on us to celebrate this wiki approach to policy formulation.

The jury, of course, is still out as to the merits of the actual proposal. It certainly deserves minute scrutiny and my current inability to appreciate its fine print is far too real to hazard any early judgement. Yet, it must be recorded that it heralds the resurrection of one eminently logical economic shibboleth hitherto consigned to the dustbin: The premise of lower incidence promoting higher compliance had been anathema to North Block mandarins for years and finally seems coming of age. A second toast to the Finance Minister!

Unfortunately, not much of the succeeding discourse on the tax code may be available for ready view in the medium term. The promise in this citizen-friendly reform however gives one the confidence to ponder the fate of another far-reaching change - the GST. Similar streamlining of tax administration has already been accomplished by almost every self-respecting economy of benchmark size and scale. The Indian effort has, lamentably, fallen into a quasi-political quagmire. Given the federal nature of the country's revenue system, GST can only come by via legislation, including constitutional amendments, to junk existing laws as also the creation of a common dual (State and Central) framework it perforce requires.

Building universal consensus on the GST, though, has led to endless debate over its management mechanism, including creation of appropriate infrastructure, and on sharing of its spoils. Equally, it may be simplistic to expect that the fact of different political formations being in power in key States and the Centre, and the much-voiced 'loss' to the former (plus concomitant demands for compensation) is merely a coincidence. It is, more likely, a refined filibustering tactic.

It does appear therefore that the question of whether a nationwide GST is actually needed, is a moot one. Much like Direct Taxes, India's Indirect revenue regime is an elephantine and often conflict-prone labyrinth of state and federal levies that we berated when studying Economics in college fifteen years ago (it was not new then; it is not new now). Fact is that the framework carries the baggage of its roots in our colonial past, and is arguably anachronistic. Applying whatever little one remembers (not that it was ever entirely put to rote!) of economic theory, there are two clear wins in its reform. First, elimination of multiplicity simplifies tax structure and fosters compliance (similar to what Pranab da has already been commended on above). Second, creation of a common market and lower tax burden boosts production, directly and via increased investible surplus: the logic on which EU was born, or ASEAN thrives today.

While actual gains from the implementation of a reformed Direct or Indirect Taxes regime are either the subject of impassioned debate (my Commie friends any way derive sustenance from chatter, especially of the idle kind) or entail expertise in macroeconomic theory more than is my métier, it is likely that Come April we may be raising ours for two and a half cheers to Mr Mukherjee!

Of Temples and Twitter

Long years ago, when trials typical of Tentative Teens had not yet become an amusing memory, a family trip got me to the Royal land of Rajasthan. The architectural delights were dime a dozen, almost too many, as we tried to take in those majestic forts, intricate carvings, and imposing ramparts. Amidst the breathtaking grandeur and wonders of craftsmanship, a hearty hospitality stood out (apparent even in our sarkari arrangements). Again, this sunny geniality was in flagrant contrast to the fractious infighting whose undercurrents were implicit in Rajputana's many a tale of valour.

Nowhere was this enigmatic paradox of gallantry and fraternal discord more manifest than the indomitable fortress of Chittorgarh. Its remarkably well-preserved battlements were monument to the doughty challenge Rajput kings had posed to numerous invaders, yet often felled by the enemy within. One artefact in particular held my imagination at once. The king's bed (literally) carried the most unflatteringly modest dimensions; one that no self-respecting modern hostel would proffer under the name. Truly, allowing for some inaccuracy of magnification intrinsic to heroic myth-building, it was difficult to imagine the imperial bulk measure up to five foot nothing! An explanation was requested; and readily provided. It turned out that the royals preferred a smaller bedstead to enable their feet, knee downwards, to stay unfettered in combat. And a duel was much in order, the slumber (likely) and awakening (surely) being caused by the potentate being tied to the couch by one of the family's over-ambitious black sheep!

If the threat within sounded surreal, its external cousin was a lot less so. Mind you, this credibility rating was not on account of any reduced lethality in its consequences. Simply put, its higher probability made it appear commonplace. The most potent of this deadly-but-discounted-as-way-of-life set of enemies through Rajput history was the advancing Mughal empire. (On a related note, the singular alacrity with which a number of their progeny, their might much depleted and xenophobia strangely muted, accepted British subjugation a few score years later, is a curious and educative quirk of history.)

Like many parts of Rajputana, one of the relics of Chittorgarh's struggles of yore was a partially ravaged Hindu temple. Now this was early 90s; with Ayodhya-Kashi-Mathura movements still a dominant influence in national politics. Thus, risking a frown of obvious disapproval from the pater, one could not help but ask our escort for some pearls in clarification of this Medieval history thread. He had many and, surprisingly for one in quasi-judicial employment, was voluble in voicing them, especially after (or since) the rest of the entourage was not in earshot. Of these reasonably insightful hypotheses, one struck a chord for its incipient logic and bearing, namely the role of the temple as a theater for organized dissent.

In a nutshell, the rationale went thus: once the victorious left, the vanquished would ritually congregate at the temple to mourn the dead and pray for their deliverance, but equally to bemoan their own plight, seek cameraderie in numbers and ultimately the strength to fight from the Heavens. On the contrary, with the shrine pillaged, first efforts would go towards its rebuilding, setting organized resistance back a few years in funds, foot soldiers and foundation. The symbolic value of mental domination, hence, was perhaps a mere bonus over this bondage of resources; a true Machiavellian masterstroke.

Of course, apart from realpolitik, dogmatic drivers fueled this plunder too, Aurangzeb being the flag-bearing specimen of this ilk (and most lambasted member). Piety aside, the missionary zeal and state sponsorship he accorded to the task of temple destruction, had no parallel. This is not to suggest that his predecessors were beacons of benevolence: history (even in its recounting under as heavy-handed a Marxist influence as ours) is never that black and white. For instance, Shah Jahan gave us the Taj, an icon of Incredible India, but its pristine glory is indelibly soiled by the sweat of millions who paid for it in taxes (not lessened by the fact that such a price in human suffering is embedded in similar Wonders of the World across ages).

In any event, Aurangzeb 'the Austere' remains the most reviled of all Mughal monarchs. Many counts have been cited of his bigotry. For instance, he ordered that holy verses and imagery of Caliphs in coin inscriptions be replaced lest they get tainted by kaffir touch or use in unworthy places. Scholars highlight his adoption of the Arabic Lunar Calendar, withdrawing court patronage of music or reimposition of jiziya in argument too. Yet, his promotion of temple demolition under a policy of prohibiting practice of 'idolatrous forms of worship' remains core to the anti-Aurangzeb charge. His reign and actions wrote the preface, if not the first chapter, in the eventual transition of theological dialogue into the arena of incendiary politics. Skim through later history and it is easy to discern elements of this: razing places of worship as tool of war, inflamed debates on primacy of schools of faith, or high voltage drama spilling over to the streets.

Other forms of insurgency are no less a worry, including an Establishment going overboard in reprisal, that lends a new lease of life to many dying rebellions. However, spare a thought for temples where the will of a silent majority, retreating in face of high decibel onslaught of instigators on either side, gets an opportunity to break free. It is these new gods that one must chart.

Technology today presents us with many such modes. Films, for one, may help a generation awaken: Jessica Lal, BMW hit-and-run et al bear testimony to its pulling power. TV provides a cause célèbre and hence expanded pressure group on occasion. Yet, these media (including print) remain essentially plutocratic, overweeningly Left-leaning, and occasionally self-serving. My closing postulate is that the most promise is held in the low-cost, easy-to-use (and someday ubiquitous) Mobilephone-Internet combination. True, the Twitter-enabled Iranian voice of dissent died without daunting the world, and guns beat phones hollow even in an RTI-enabled world, but peer-to-peer networks will change many lives yet, mostly silently, but sometimes in the theater of visible discontent.