After All is Said and Done: Budget 2015-2016

As usual it is that time of the year when the Finance Minister has had his say on the proposals for garnering revenue and the expenditure. To me it makes little difference on where the money goes and as is usual for politicians of any hue, the proposals are based on political considerations and the immediate exigencies of political life.

Be that as it may, my concern is more on the revenue side and in that lies the answer of how the Government hopes to bring in the moolah to fund various schemes that it sets itself to conclude to fruition.

Here is an extremely short version of what the Govt hopes to do

(Rs in crores)

2014-15 2015-16 Increase over previous year Percentage Change
Tax Revenue 1251391 1449490 198099 15.83%
Non-Tax Revenue 217831 221733 3902 1.79%
Total Revenue 1469222 1671223 202001 13.75%
Capital Receipts 554863 655902 101039 18.21%
Capital Expenditure 170543 217319 46776.08 27.43%
Revenue Expenditure 1488779 1536046 47267 3.17%
Debt Position 6278553 6894690 616137 9.81%
Contingent Liabilities 270628 249502 -21126 -7.81%
Interest Payments 411354 456145 44791 10.89%
Rupee Loans 3866079 4325485 459405 11.88%
Corporate Tax 426079 470628 44549 10.46%
Income Tax 278599 327367 48768 17.50%
Disinvestment 26353 41000 14647 55.58%

Every budget is simply a statement of what is to be extracted from the populace and what is to be spent on them. There is an element of injustice in that people that the Govt. spends on are generally those who do not contribute to the exchequer, directly. But that is the price one pays for living in society. There is another injustice in that the Govt. plucks only low hanging fruit, namely the salaried class that has no escape from the amount of tax deducted at source. On the other hand a businessman has the choice of first charging all his expenses to the business and then paying tax, if at all, on the net income. So his car expenses, the interest on his car loan and who knows, his home loan as well are all paid for by Jaitley uncle, who in turn extracts the money from toi et moi! All his expenses on food, whether at home or outside becomes entertainment expense. His new BMW is a part of corporate purchase and he uses it happily for his personal purposes, ferrying his children to school and the memsahib to the club or the mall or wherever! This is because he is supposed to be taking a ‘risk’. Well, the only risk is with the bank that has so happily lent money to this person or his company. When his company goes belly up, there are some assets in his wife’s name or minor children’s names and are thus untouchable.

The above list is merely illustrative rather than exhaustive. The salaried class people are the biggest suckers and will still vote for the BJP or Congress or whoever. Nonetheless, the congress never ever tried to cater to the middle class, concentrating on the Muslims, the dalits and adivasis as also others considered poor.

Here the BJP has totally betrayed the salaried class. What else can one say if there is not single sops for the salaried class except, the you save and you save tax kind of nonsense? Still, they have managed to fool the commentariat who believe that this is a ‘balanced’ budget. All budgets are balanced, in the sense that the two columns of income and expenditure add up to the same amount. The entire budget is built on smokescreens and illusions. For instance, the reduction of corporate tax to 25%, fine print saying we will do this over five years. 2019 is a big illusion. BJP may or may not be in power after that election! The new Govt. will always try to do just the opposite of what has been done by the BJP.

To me the BJP should have addressed the asymmetry of taxation loaded against the salaried class. They should have spread the burden to everyone, except those who are really poor. To illustrate the asymmetry, please go through the next para.

We have a total population of 1.2 billion people, of which roughly 50% are below the poverty line. So that leaves us 60 crore people who can pay some taxes. You have an Aadhar card which will become compulsory. Filter out all those who are BPL. Here is an analysis of how many Indians pay taxes and how much (thanks to Mr Arun Prabhudesai for this nugget http://trak.in/tags/business/2012/04/30/income-taxes-paid-indians-overview-numbers-graphs/) : –

And here are the figures of how much is collected from people in various tax slabs: –

Slab (Rs. in crores) Percentage of tax collected
0-5 lakh 15,010 10.10%
5-10 lakh 21,976 14.80%
10-20 lakh 17,858 12.10%
>20 lakh 93,229 63.00%
Total 148073

So we are dependent on a miniscule 1.3% of taxpayers to pay 63% of the taxes. Most of these people must be salaried and cannot escape taxes. What of the vast unwashed who buy the BMWs and still come in the first two categories.

To me, it is impossible that only 1.3% or roughly 4.21 lac people are in the top bracket. In India paying taxes is a mug’s game. Let us start concentrating on those who earn substantial monies like the chaatwala who owns two houses and five plots or the panwala or the kirana store guy. Most of these persons pay no taxes. They would form at least 20% of the population. Create a presumptive tax of RS 6000 or Rs 500 p.m. for each of these worthies. Renewal of licences can be made dependent on payment of presumptive tax. This proposal itself would fetch Rs 72000 crores. Suppose we are able to get a tax base of roughly 25% of the populace or 30 crores. Going by the Pareto principle, 80% would fall under the lowest bracket. That is 24 crore people who have incomes that can be covered by presumptive taxation. The revenue yield will be 1,44,000 crores and this is a new stream. Create three slabs, one lowest or 6000 p.a., second 12000 p.a and a third of 24,000 p.a. Assuming an yield of 18000 p.a. on an average from the remaining 6 crore people, the total tax revenue would be 2.52 lac crores. The total individual income tax budgeted for the current year is Rs3.27 lac crores.

This is only one small illustration of the possibilities of collecting taxes from the untaxed. However, we are still keeping a large portion of people out of the direct tax net. And there is a painless way by which all people will pay tax and without cribbing. It is entirely possible to abolish income taxes and other claptrap such as service tax, sales tax, excise duty etc.

I was fascinated by Baba Ramdev’s proposal of a Banking Transaction Tax or BTT. So I did a bit of research into the feasibility of imposing such a tax. To begin with, it is a tax that can easily be computed and collected as the onus would be with the banks that do the transactions. The amount per transaction can be calibrated such that the maximum payable amount would not be in excess of say 5% of the debit and credit legs of one transaction. Here is an illustration. Let us say a person gets an income of Rs 50,000 a month. He or she would pay Rs 500 on the credit to account, if BTT is fixed at 1%. Per annum this would be Rs 6000. Assuming the person saves RS 10,000 p.m., the amount spent would be RS 40000 p.m. on which there would be a BTT of Rs 400 p.m. Hence, the tax payable would be Rs 10800 p.a. At current rates of taxation, the tax payable would be Rs 25000. This does not include indirect taxes that are levied on whatever goods or services purchased by him or her. Assuming that is 10% on an average, he or she ends up paying a total of Rs 4000 p.m. or Rs 48000 p.a. as tax

Point that arises is whether the tax collected thus will be adequate for compensating the revenue lost from direct and indirect taxation? For this I took the figures of banking transactions only of RTGS, ECS and NEFT. This excludes the figures of cash transactions in banks, transfers, clearing etc.

As an illustration, I collected the figures regarding Banking Transactions, only from ECS, NEFT and RTGS. The total transactions as per RBI’s site http://www.rbi.org.in/scripts/NEFTView.aspx are as under (until January 2015 this fiscal): –

Total ECS Transactions                                                   Rs 309000 crores

Total NEFT Transactions                                          Rs 9496000 Crores

Total RTGS Transactions                                          Rs 123233000 crores

Total of ECS, NEFT and RTGS till January 2015      Rs 133038000 crores

Expected Transactions till end of current fiscal        Rs 159645600 crores

Transaction Tax at 1.5% of transactions                  Rs 2394684 crores

Transaction Tax at 1.1% of transactions                  Rs 1463418 crores

Total Central Taxes Budgeted for 2015-2016        Rs 1449490 crores

This illustrates why a completely new paradigm is necessary for collecting taxes. The current machinery is grossly inefficient and also prone to corruption. While the presumptive tax can replace personal taxation, the BTT can replace all other taxes. Now, no VAT, no Sales Tax, no Service Tax etc. would need to be collected. All these would just vanish. This money can be collected easily and without hassles. Give banks three to four months to get their systems compliant for collecting BTT and automate the collection process as well as submission of returns.

Imagine how easy it becomes to move goods around without having to worry about this and that tax. How much time would be saved by businesses? Further, the tax on banking transactions has only covered electronic transfers. The vast transactions through cash in banks and clearing transactions have not been mentioned here as there are no dependable sources of information on these transactions. But these will also yield a big bonanza. My estimate is that a BTT will result in revenue of over double the current year’s fiscal budget

The government can work on exceptions such as subsidy transfers for people below the poverty line etc. The surplus revenue gained from all these transactions will be more than adequate to fund infrastructure and create employment for all.

The question therefore is whether the Government will implement such an idea that makes collection of taxes easy and allows the people to breathe freely. Moreover, since the burden of transaction tax collection falls on the banks, submission of returns etc. by the lay public etc. will be unnecessary. Since the taxes are themselves not onerous, there will be very little resistance. Further, black money generation will also get reduced.

We now come to the trillion dollar question on what to do with the vast bureaucratic army that will now become redundant virtually overnight. Here is one possibility, let them handle arrears of taxes and clear all backlog in the next two years. You will still need some people to handle the returns, do audits of banks for proper compliance etc. One will also need to start educating the lay public of routing all transactions through banks.

The second phase should see a reduction or elimination of other duties such as stamp duty. This would reduce undervaluation of properties and other evils. Ideas for what to do with excess staff are welcome.

If the Government does not seriously work on elimination of virtually punitive taxation and create a mechanism as above to create a genuinely easy to comply taxation, thus eliminating a plethora of useless bureaucrat enriching and expenditure bloating system, we voted for this Government for no reason at all!

As for the rest of the budget, just a few things tell me this is a Babu ka Budget.

2014-15 2015-16 Increase over previous year Percentage Change
Tax Revenue 1251391 1449490 198099 15.83%
Non-Tax Revenue 217831 221733 3902 1.79%
Total Revenue 1469222 1671223 202001 13.75%
Capital Receipts 554863 655902 101039 18.21%
Capital Expenditure 170543 217319 46776 27.43%
Revenue Expenditure 1488779 1536046 47267 3.17%
Total Expenditure 1659322 1753365 94043 5.67%
Debt Position 6278553 6894690 616137 9.81%
Contingent Liabilities 270628 249502 -21126 -7.81%
Interest Payments 411354 456145 44791 10.89%
Rupee Loans 3866079 4325485 459405 11.88%
Corporate Tax 426079 470628 44549 10.46%
Income Tax 278599 327367 48768 17.50%
Disinvestment 26353 41000 14647 55.58%

Out of Rs 1671223 crores collected as revenue, 92% is revenue expenditure! This is an improvement over that of the previous year where revenue expenditure exceeded revenue collected. What this means is that the revenue being collected, including non tax revenue goes to fund daily expenditure.

There is an increase in debt to the extent of Rs 6.16 lac crores. I still remember Nani Palkhiwala’s lectures on the budget at the Brabourne Stadium that I attended three times in the late 80s. The one thing he repeated year after year was the debt position where he warned about how debt would consume the country.

There should have been one proposal, to provide an avenue for people to invest their savings over the long term for infrastructure. This should come through the banks that in turn should be able to lend the money to borrowers who take up long term infrastructure contracts through a BOT mechanism. India’s homemakers are big savers and need to be respected and complimented. A Govt. guaranteed scheme for lending for the National infrastructure development can only be a win win for all. There has to be some kind of training to bankers to appraise long term financing for infrastructure projects.

Stupid thinking is never accidental. The Government looks at everything from the prism of enhancing complexity and thereby the power of the establishment. Putting a lawyer in charge of the Finance Ministry is also an idiotic step. Here is why. A lawyer thrives on arcane knowledge of the law and anything that makes it intelligible to the vast unwashed will make him or her redundant. One needs to put someone like Dr. Swamy who thinks that income tax is an unnecessary burden on the salaried class as the Finance Minister.

Oh Dear! If only wishes were horses…..

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