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Mainstream, Vol XLVI, No 10

Reduce Tax Burden on Common Man

Sunday 24 February 2008, by Bharat Jhunjhunwala


The people’s support for the Congress seems to be receding despite the high growth rate of nine per cent and implementation of the people-oriented Employment Guarantee Programme. The party has lost power in Punjab, Uttarakhand, Gujarat and Himachal Pradesh. The increase in Maoist activities and restiveness of the people, as seen in the flare-up of the son-of-soil syndrome in Maharashtra, are indications in the same direction. People are disaffected. The coming Budget can make a decisive difference in the fortunes of the Congress party as well as the people.

Why should the common man be unhappy despite the high growth rates and rise in per capita incomes? The answer lies in the distribution of wealth. The increase in incomes has wholly accrued to the middle and upper classes. There is little for the common man in it. The daily wage for a skilled worker was Rs 80 about five years ago. Today it has risen to Rs 100. But the prices have also increased. Taking inflation at four per cent, the real income of the worker has actually declined. He is agitated because the high rate of economic growth for him is like the basket of fruit kept in the showcase of a shop which he cannot enter.

He has benefited from the Employment Guarantee Scheme. But there has been a decay of his traditional sources of income. Trades such as selling buttermilk and making earthen pots and leather chappals have become nearly extinct. This loss has only partly been compensated by the Employment Guarantee Scheme. The poor fellow has lost his income of 300 days while he is getting relief on an average for only 35 days.

The Congress had declared in its Election Manifesto about its intent to increase the tax-GDP ratio. The thinking is that higher rates of tax and revenues will make it possible to increase government expenditures on employment guarantee and mid-day meals. The Congress Government has indeed delivered on this promise and made increases in expenditures on these heads. But in order to understand the impact of these one has to look at the total incidence of tax on the common man.

Tax collection from the rich has increased. Personal Income Tax and Corporate Taxes are especially buoyant. But this does not mean that the burden of tax on the poor has decreased. More damage to the fields of the landlord from floods does not mean that the small farmer has gained. He loses, though to a smaller degree. Yet, his pain is much greater because the small loss represents a bigger share of his income. Similarly increased collection of taxes from the rich has come along with increased collections from the common man. His burden of tax has increased variously—service tax on telephones, electricity and transport have been increased, for example. Tax rates on coarse and fine cloth and on unbleached and bleached paper have been equalised in order to simplify the tax system. But this has led to higher burden on the coarse material that the poor man buys. In the end the common man is paying higher taxes. The additional burden of tax on a family earning Rs 4000 per month would be, in my reckoning, about five per cent or Rs 200 per month or Rs 2000 per year.

The gains from the Employment Guarantee Scheme compensate for this loss, but only partially. It is reported in newspapers that the average number of days for which the beneficiaries are actually getting jobs under this scheme is about 30 days in a year. He gets wages of Rs 75 per day or Rs 2250 per year. It is reported in newspapers that Pradhans are paying 30 per cent commission to government servants for approval of these projects. In some cases, the village Pradhan is collecting this amount from the beneficiaries. The real gain to the common man is, therefore, less. In the end he has got no net gain from this whole exercise of raising tax rates and people-friendly expenditures. No wonder he is restive.

THE Finance Minister can easily rectify this situation. On the collection side he must give up the effort to make one single tax rate. Goods must be classified from the standpoint of the buyer. Goods used by the poor, such as bus services, rural telephones, cheap cloth and soap, bicycle tyres and match boxes, should be made tax free or taxed at low rates. The Finance Minister should remember that the purpose of one single rate of tax is to generate efficiency so that the cost of goods is reduced and consumption of the common man is enhanced. But a single rate has an opposite result when applied to goods consumed by the poor.

Take the case of match boxes. Let us say the match box previously contained 48 match sticks. Now it contains 50 match sticks because the tax system has been simplified and the economy has become efficient. The buyer saves four paise on a match box of Re one. But, say, the tax rate on matches is increased from eight per cent to 16 per cent in order to obtain this efficiency. The common man pays an additional seven paise tax. In the end the gain to the common man from efficiency is eaten away by the increase in tax. The Finance Minister must, therefore, reduce the level of taxes on items consumed by the common man. I daresay the budgetary impact of this will be small because the common man buys few goods while the beneficial impact on the common man’s income will be large. The Finance Minister will gain huge popularity also. But he will have to overcome his obsession with efficiency—which, in its present dispensation, means efficiency for he who has the purchasing power.

There is a need to make improvement on the side of expenditure also. The present model is to pay more salaries to government servants ostensi-bly to reach benefits to the poor. Government teachers are paid high salaries but they do not teach and the children of the poor fail in larger numbers. The Finance Minister should instead provide education vouchers to all the youth in the country. Let them encash these vouchers either in government or private schools. This will empower the common man instead of empowering the government servants as is the case at present. There is a need to make a huge increase in expenditures on the judicial system. The poor often bear the crimes of the rich because redressal from the judiciary is slow and costly. The poor fellow has to go hungry on every date that his case is fixed in the court. The poor should be provided with quick justice. Similarly, instead of spending huge monies on government hospitals the Finance Minister should pay the money directly to the poor families in form of vouchers with which they can buy milk, Chyawanprash or other specified health foods. The health of the people will improve spontaneously because they suffer more from malnutrition and less from diseases. Such creative policies will provide relief to the common man and also bring laurels to the Finance Minister.

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