GST-regime or VAT-regime or NO-tax regime?

Picture this:

It’s the year 2050. After much deliberation, lengthy parliamentary debates and raking in experts’ opinions, the Government finally released Capping of Bribe Amounts Act (CoBAA ) on the 15th of March. CoBAA basically puts a cap on the amount of bribes that government officials can take, specifying slab rates for various categories of services. For instance, for issuance of ration cards, it is capped at Rs.50,000 per card. There is an outrage, understandably. Not amongst the masses, as you might presume, but amongst the officials who believed their voice hasn’t been heard in the framing of the Act. Especially considering the fact that they have been battling for two decades, with their efforts culminating in 2040 with the legalization of bribery and within just ten years of their success, there is now a cap on the amounts they can earn in the form of bribes, much to the delight of the masses. There is still quite a lot of debate going on amongst the masses on the slab rates. While some believe they are too high, others, especially experts, believe the rates are on the lower side and could adversely affect the economy. In their words, “a healthy bribe rate augments well for the officials - who will then be motivated to perform their job better, which leads to prevention of bottle necks for public services - which is a win-win situation for the officials and the public”. Another key feature is the introduction of e-bribe app through which bribers can make e-payments of the bribe, by mentioning the official’s ID number and such amount will get credited to the concerned official’s bank account, along with his/her salary, thus easing the whole bribing process!

As silly as the above scenario sounds, it brings to fore an important point. That is, when people are born in oppression, see and experience nothing but oppression all around, they get institutionalized to believe that such oppression is a necessary part of the system. They start looking at evil in relative terms, not objective. In the current day scenario, the world debates, argues and questions the rates of tax, not tax itself.

Direct and Indirect Taxes

To understand this better, let us consider the Indian taxation scenario. Though we are discussing this in the Indian context, these concepts hold true for most countries, globally. Come January 2018, the Gulf countries like UAE and Saudi Arabia will be no exception to this, with the introduction of VAT, an indirect tax. 1

Taxes, as we commonly know them, can be broadly categorized into two - Indirect Tax (IDT) such as VAT, GST, Service Tax, Customs, etc. and Direct Tax (DT), which are your income taxes and its various forms.

IDT is a very 'just' tax, in that it doesn’t distinguish between old/young or rich/poor and taxes them equally.

DT on the other hand, differentiates based on income. So, a person earning up to Rs. 2.5 lakhs doesn’t need to pay any income tax, while someone earning Rs. 10 lakhs pays approx. Rs. 1.25 lakhs as tax. Fair, you say?

Let’s analyze it with an example. A and B both earn Rs.10 lakhs p.a. A is a bachelor with no responsibilities but himself and thus has a lot of savings, because naturally his expenditure is not very high. B, is married with four kids. He earns hand-to-mouth and has no savings. Yet, both pay the same income tax amount, of around Rs. 1 lakhs. Fair now?

One of the few taxes which taxed the wealthy and spared the not-so-wealthy (Wealth Tax), was recently abolished in India. This was coupled with an increase in the surcharge for the super-rich (the moderately rich are relieved!). The logic was that the tax recoverability from the rich would increase. Yet, that doesn’t relieve the family man ‘B’ in our example above, from paying his income taxes and indirect taxes, despite having to provide for a six-member family. Rather, the same Budget (2015) which abolished the Wealth Tax, increased the Service Tax, which is an indirect tax that taxes the pauper and the billionaire alike.

Then came the Goods and Service Tax (GST). Some rejoiced, while others frowned. Those frowning were not frowning because indirect taxes were not eliminated, but because they were not happy with the rates, or the process, or other related reasons. The purpose of this piece is not to ascertain whether GST is better than the previous VAT-ST regime. Taking sides would mean approving either of the two, but we approve neither. Why so? Is it because we believe that there is an alternate tax regime that is better than both?

Yes and No. No, because we do not believe in taxes, as we know them commonly. Yes, because we believe in an alternate regime that provides for an IDT-free and an income-tax free system.

A tax-free system?

The immediate reaction, understandably is - how is it possible to run a state without these taxes?

Before we attempt to answer that, let us look at the Budget and Revenue of the Indian Government.

For the Financial Year 2016-17, the total government

expenditure, State and Centre combined, was approximately Rs.42,00,000 crores (Rs.42 trillion). Total tax revenues (State + Centre) were about Rs.27,00,000 crores (Rs.27 trillion). So basically, what they’re telling us is that they needed Rs. 42 trillion to run the country at the current expenditure/growth level and that this was funded by tax collections, for up to Rs. 27 trillion. 2 3

Now consider this: A study by ONE, a global NGO advocating elimination of poverty, found that India was losing $1 trillion annually, to corruption around deals for natural resources, which is approx. Rs. 64 trillion! 4 End our case there, shall we? But we all know that is just one side of the story.

First of all, with a debt-to-GDP ratio of 68.5%, a significant chunk of the Budget goes towards interest payments and debt servicing (Rs. 7.6 trillion). That means, not all of the Rs. 42 trillion was ‘spent’.

Then there is corruption in the form of siphoning-off of funds meant for public use. Hard to quantify that, but there is the 25% cut of public funds rule, in common knowledge.5 Makes you wonder - is the increased tax collection meant to increase the pockets of the Babus?

There is also bribery. Again, hard to put a figure on it, given the mammoth amount of transactions that happen on a day-to-day basis. However, a survey revealed that about 62% Indians had first-hand experience of having to bribe an official.6 You can do the math, to imagine the quantum of amount lost.

That’s not all. Various estimates of a shadow economy in which black money (money on which no taxes were collected) circulates, range from 26% to 75% of the GDP, which in current terms, is Rs.44 trillion – Rs.127 trillion!7 8 A lot of the black money is stashed away in offshore tax havens. Goes without saying that the people able to do that are the wealthy and not the poor. So basically, the indirect taxes are forcing the poor and the middle class to bail out the tax-avoiding rich! I hear some scream - “demonetization”. While the ostensible purpose of this was to recover black money, it turned out to be more of an eyewash, because IT probes have proved that less than 6% of all of the black money is actually held in cash.9 That exercise largely resulted in the general public being arm-twisted into depositing money in cash and thus provide the failing banks the much needed liquidity, while the black money stored as dollars, shares, buildings and Swiss francs remained unaffected. Despite what they tell you about them doing this or that to bring back black money, the fact remains that it hasn’t come back. 70 years of independence, and we continue to pay 28% tax on buying a washing machine!

So they take away a percentage from the income of a beggar (yes, even a beggar pays IDT) and give him back ‘free’ benefits, by taking away some more of his income in bribes; what ultimately reaches him of the benefit, is also a version that is diluted by corruption.

For instance, BPL cards given in exchange for a bribe, which are used to buy adulterated food. Basically, tax + bribe + adulteration = cheap food for the poor. Triple cost there! (or triple blow?). Or worse still, the food meant to be distributed to BPL holders gets sold in the open market. So make that quadruple.10 11 12

Then there are the ’free‘ government services - such as government hospitals, where people die of negligence by the dozens13 14 15 16 or where even the handicapped get no wheelchair for not paying a bribe17 18 or where babies get swapped19, or the ’free‘ schools where English teachers cannot spell a single word of English20, or the ’free‘ mid-day meal consuming which children die and fall ill due to food poisoning again21 and again22 and again23.

So then how much is the tax collection actually helping the country? Is it being collected fairly? Is it being spent sincerely? Who decides where to spend it anyway? It’s the government, of course. They can choose to spend a quarter trillion Rupees on hosting international sporting events24 or to operate stations in Artic and Antarctica25 - rather than look to resolve poverty in a country where 58% of the population earn less than $3.1 a day26. Totally their choice, really.

Coming back to the budget, subsidies take up about Rs. 2.5 trillion. These subsidies, as various studies including the Economic Survey, 2015, noted, aid the rich more than the poor.

Let’s consider an example to understand better. Ramesh, a daily wage laborer gives away 14% of his earnings in the form of IDT. One of the expenditures of the Government is the subsidy in railway tickets and LPG. Assuming he never has the need to travel by train (80% of the poorest passengers constitute only 28.1% of total passenger fare) and does not have an LPG connection (only 25% of the poorest 50% have one), he is, in effect, funding the partial train cost of the train passengers and LPG users. Similarly, fuel subsidies are enjoyed mostly by the rich and upper middle class.27

One might argue that at Ramesh’s level of income, it could be presumed that he buys only necessities like food, clothing and shelter. Aren’t necessities free of tax?

Well, items like vegetables, milk and fresh meat are, but Ramesh still needs to buy essentials such as toothpaste, soap, tea, coffee, sugar, clothes, footwear, utensils, furniture, medicines, etc., upon which he pays between 5-18% tax. Supposing he saves little by little for many years by cutting down on certain basics so as to buy either a bike or a TV or a refrigerator or even an auto-rickshaw, he pays 28% tax on it! No exemption for the poor there.

Again, one might argue that Ramesh benefits from other government spending, such as roads and parks and government hospitals, et al, for his tax contribution. In the alternate system that we mentioned about, Ramesh gets these for no loss of his earnings, i.e., for no tax at all. The alternate system has no IDT for anybody and no DT for a person like Ramesh.

So how is GST better than VAT/ST? Has that removed these indirect taxes for the poor as it is being touted as ‘good and simple tax’?

The tax rates that Ramesh is paying are quoted at the current GST rates - so it is nowhere close to eliminating IDT, rather only consolidated taxes such as VAT, Service Tax, Excise and other fringe taxes into one. Resultantly, certain products and services become more expensive while others become cheaper. On whether it results in increase in benefit or burden to the ultimate consumers is hard to tell at this initial stage. In any case, like we said earlier, we are not here to evaluate whether the previous IDT regime was better than GST or vice versa. IDT itself is oppressive.

Revenue of the alternate system

No IDT you say? So the DT must be very high in the alternate system?

Actually, there is no income tax in that system. There is only wealth tax, which if simply put, is calculated at the rate of 2.5% on savings above a certain limit. To understand the difference between income tax in the current system and wealth tax in the other system, return to our example of A and B above. B pays no tax in that system if he has no savings, despite earning the same as A.

You think 2.5% is too little? Another major differentiator between income tax and wealth tax is that income tax is charged just once on the income earned in a certain year and that income which converts into wealth is left untaxed forever, whereas under wealth tax, the same wealth can be taxed year on year, perpetually. Let’s consider this in the Indian context. The Indian GDP for the year 2016-17 is approx. Rs. 145 trillion. This is just the output value created in a single year. As regards total wealth in existence, there is no reliable measure for that; however you can only imagine the value of wealth over the years, when a single year produces Rs. 145 trillion. That is quite a decent amount of money collected under wealth tax, while not taxing someone who has no savings at all - irrespective of his earnings! This reduces the gap between rich and poor, whereas in the current capitalist system all over the world, the gap is only increasing. Therefore, it is foolish to rejoice when the news reads that the GDP growth is on the rise. We need to rifle through the layers of such news to identify how much of it is actually reaching the masses. Oh! But the rich will cry in that system, no? You don’t need to be an economist to understand that with increasing purchasing power (no IDT), spending increases. What also increases spending and investment is the fact that there is little to no incentive to save (wealth tax on excess savings). And increased spending and investment leads to increased economic activity and thus, growth for the businessmen as well- rich and poor alike. Win-win situation?

In the DT-IDT regime, the dynamics are very different. In India, the average tax rate an individual ends up paying is 20.3% (Total tax receipts/National Income).28

When that tax rate is viewed in the context of the various facets of Indian economics, the below questions pop up:

• If we have to anyway pay a bribe to obtain supposedly free services, why pay taxes to fund the salaries of Government officials?

• If what the public gets of goods and services (from the Government) is of a sub-par quality, why pay full taxes?

• Why should a poor person pay taxes to fund for services he never uses?

If the super-rich are able to stave off taxes through devious means, why should the honest tax payers be penalized with additional taxes to meet the government expenditure?

In fact, if the Government could make more money by preventing corruption in utilization and allocation of natural resources than the total amount of Budget itself, why pay any taxes at all?! And why borrow humungous amounts of funds and pay the borrowing cost out of taxpayers’ money?

Now does 2.5% of the total wealth sound too less?

Budget of the alternate system

The ruler in the alternate system does not have a free hand at spending the treasury funds as and where he likes. There are defined specifics about the sources of funds and where they are spent. Such as, eight categories of people to whom certain type of funds collected, can be given to. But, if we look at the obligatory expenditure of the State, the system clearly defines six broad categories. Those are:

1. Spending on the poor, needy and wayfarers;

2. Expenses such as the salaries of soldiers, civil servants, judges, teachers and the like, who provide services for the benefit of the public;

3. Expenses due in the form of services and caring of the public (includes the necessary infrastructure, health, education, etc.);

4. Expenditure upon emergencies like famines, earthquakes, floods and enemy attacks;

5. Maintaining the military for executing the system’s foreign policy and what is necessary for it;

6. Expenditure on military industries.

If the treasury funds are not sufficient to meet the above categories of expenditure, then additional taxes to the extent of meeting the above six expenditures ONLY, will be collected from the wealthy alone, in excess of their basic needs and their luxuries, according to normal living standards. In no case will those with no wealth be taxed. If on the other hand, there is surplus funds in the treasury, THEN the state will look to pursue other interests for the betterment of the public’s living standards.29

While there are currently no models to draw examples from, as this system is not in implementation anywhere in the world, we can still obtain examples of prosperity during the system’s rich 1300 year old rule. One is that the very first ruler under this system, introduced a minimum income disbursement of 10 units of the then silver currency, from the excess funds in the treasury, to every citizen of the state, enough for every person to lead a decent standard of living with all basics covered.30 In a little over 80 years, during the time of the 12th ruler, there was hardly any person in the state who was in need of charity.31

The system also marked significant advancements in science, technology and innovation, with thousands of inventions and discoveries and establishment of modern infrastructure, education, hospitals, etc. - all thanks to the treasury surplus.32

But what if corruption eats away that surplus treasury value? Well, the system has some in-built mechanism to tackle that to a great extent and that is a topic in itself, beyond the scope of this article. Actually, there are a lot of other factors in an economy that combine together to produce results. Various such factors are different in this alternate system as compared to any capitalist or communist economy, such as the absence of interest (on any type of borrowings) which prevents the circuity of income amongst the rich, a bimetallic standard - which eliminates the power of the elite few to control the monetary policy, prohibition of ’limited liability‘ form of entities and defining the types of businesses that can function, abolishment of privatization that prevents exploitation of natural resources by a few, et al.29 In fact, there are other socio-political aspects of this system, comprising certain unique features which directly or indirectly contribute to the economic welfare, apart from social welfare.

It would thus be presumptuous to say this small article should cause an immediate radical shift in the thinking of the readers about capitalist taxes. There will surely be scores of questions and doubts and ‘what ifs’ in their minds. But if it causes them to step out of their mind boxes, look beyond the overwhelming layers of media information that they are bombarded with, and start researching this alternate system, it will achieve its objectives.

So what is this 'alternate system' discussed here? For the uninitiated, it is Islam.

11th Dhul Qadah, 1438 AH / August 3, 2017

References:

1.http://www.independent.co.uk/news/world/middle-east/six-gulf-states-will-start-taxing-people-for-the-first-time-a6768206.html

2. http://www.indiabudget.nic.in/afs.asp

3. https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/0SF2016_12051728F3E926CFFB4520A027AC753ACF469A.PDF

4. http://www.hindustantimes.com/india/india-losing-1-trillion-annually-to-corruption-study/story-uK7Q0iC9mlEdr7Lld2rVCM.html

5. http://indianexpress.com/elections/uttar-pradesh-assembly-elections-2017/independent-candidate-in-up-election-says-he-entered-politics-to-make-money-fool-people-4495357/

6. https://web.archive.org/web/20130811123343/http://www.iri.org.in/related_readings/India%20Corruption%20Study%202005.pdf

7. "Shadow Economies and Corruption All Over the World: What Do We Really Know?" - Friedrich Schneider

8. http://www.thehindu.com/news/national/black-economy-now-amounts-to-75-of-gdp/article6278286.ece

9. http://www.hindustantimes.com/india-news/cash-has-only-6-share-in-black-money-seizures-reveals-income-tax-data/story-JfFuTiJYtxKwJQhz2ApxlL.html

10. http://www.thehindu.com/todays-paper/tp-national/tp-kerala/fair-price-shops-in-bribery-chain/article4771326.ece

11. http://www.radiosangharsh.org/patwari-asks-for-bribe-for-giving-the-poor-their-bpl-cards-rejects-if-he-doesnt-get/

12. http://www.dnaindia.com/india/report_rs35000-crore-food-grain-meant-for-uttar-pradesh-poor-sold-outside_1477736

13. http://www.dailypioneer.com/state-editions/bhopal/death-of-17-patients-at-my-hospital-administration-yet-to-explain-cause.html

14. http://www.theweek.in/content/archival/news/india/hospital-deaths-rights-panel-issues-notice-to-telangana-government.html

15. https://www.youtube.com/watch?v=FNSbJLbqMvI

16. http://indiatoday.intoday.in/story/telangana-hyderabad-doctors-conduct-pooja-gandhi-hospital/1/1010386.html

17. http://www.hindustantimes.com/india-news/unable-to-pay-bribe-for-wheelchair-woman-drags-ailing-husband-in-karnataka-hospital/story-NLcAQzTdpPiRhcGCjWAZCP.html

18. https://www.telegraphindia.com/1170309/jsp/frontpage/story_139749.jsp

19. http://timesofindia.indiatimes.com/city/bengaluru/Baby-swap-has-parents-fuming/articleshow/39841414.cms

20. https://www.youtube.com/watch?v=mPfDNf9kudo

21. http://in.reuters.com/article/india-children-bihar-food-poisoning-idINDEE96H05S20130718

22. http://timesofindia.indiatimes.com/india/Jharkhand-Lizard-in-mid-day-meal-96-children-fall-ill/articleshow/52622702.cms

23. http://www.ndtv.com/india-news/60-children-fall-ill-after-mid-day-meal-at-school-in-chhattisgarh-1451312

24. http://www.telegraph.co.uk/sport/othersports/commonwealthgames/8683996/Commonwealth-Games-2010-costs-ballooned-to-over-4bn.html

25. http://povertydata.worldbank.org/poverty/country/IND

26. https://en.wikipedia.org/wiki/Himadri_Station

27. http://timesofindia.indiatimes.com/budget-2015/economic-survey-2015/Budget-2015-Union-Budget-2015/articleshow/46402640.cms

28. http://pib.nic.in/newsite/PrintRelease.aspx?relid=156182

29. The Economic System of Islam – Taqiuddin An Nabhani

30. https://en.wikipedia.org/wiki/Guaranteed_minimum_income#Advocates

31. Sirah Umar Ibn Abdul Aziz - Ibn Abd al-Hakam

32. http://www.1001inventions.com/