indian budget 2006
The Indian Government is presenting its new budget this week, which appears likely to avoid any new major tax reductions. Instead the budget will propose incremental tax reforms including an increase from 10 to 12 percent in the services tax; imposition of a new tax on ATM bank operations; reductions in a few tax exemptions and certain customs duties; and other modest measures. The budget has been described as one for the aam admi or common man and, generally speaking, places more emphasis on improving services for India's 260 million plus poor people rather than continuing in the previous market-oriented reform process; certain more cynical observers have called in a campaign platform for the Congress Party in the runup to the next national elections. The Indian stock market was apparently not too worried, recording a record day at the same time the budget was being announced.
The introduction of a new budget in a foreign country might not ordinarily seem like a big deal, but India is not exactly an ordinary country. With over a billion people and an economy growing at 8-10 percent annually, India seems almost certain to be the number two economy after China in the next generation, and some people are betting it will be number one. What the country does, in tax policy or otherwise, is thus important to everyone.
Unfortunately, large size does not always lead to intelligent policies, as anyone with even a passing knowledge of Indian history will tell you. A little bit of background is useful here. For the first 40-plus years of its existence India followed a policy of economic autarky, including stringent import restrictions and the so-called "license raj" which required Government approval for even relatively small economic concessions. Income taxes jumped up and down but were frequently very high, at times over 95 pecent (!) consistent with Nehru and Gandhi's view that high incomes were inappropriate in a developing economy. To what extent anyone actually paid these taxes is open to question, although even the Government concedes that the llikely answer is, not many.
This system helped India escape famine and poverty more than usually recognized, but it did not make the country competitive with the more advanced Asian economies, and in the early 1990s the country changed gears. A gradual turn to an open, market economy including reduction or elimination of income duties and repeal of the license raj now became the order of the day. As part of this change, a series of tax reforms was enacted including an effort to reduce marginal income tax rates and broaden the tax base as well as improve administration so that, as one official put it, paying taxes would no longer be more expensive than avoiding them. The current income tax rates, following the most recent reductions in 2005, are imposed at rates of 10, 20, and 30 percent beginning at 100,000, 150,000, and 200,000 (about $2,000, $3,000, and $4,000 respectively) with an additional 10 percent surcharge on incomes over 1 million rupees ($20,000). There is also a flat 20 percent tax on adjusted capital gains, a company or corporation tax at a maximum 30 percent rate for Indian companies and varying rates on foreign corproations; a 10 percent tax on various services; and a wealth tax which exempts "productive" assets and is hence rather easily avoided. A uniform VAT at a 12.5 percent standard and various reduced rates replaced previous sales taxes in April 2005. There are also various additional levies at the state level. (The value added tax and a reform of fringe benefit taxation, together with the change in tax rates described above, were the major features of the 2005 reform legislation).
While the above are surely improvements, numerous problems remain. One is the continuing exemption of agricultural income from national income taxation, a colonial era holdover that makes little sense in today's economy but has not surprisingly proved hard to eliminate. There is moreover the obvious problem that, in a country with a per capita income of perhaps $700 per year, relative few Indians outside a few major cities earn enough and/or are sufficiently aware of the income tax in order to actually pay it. When one adds the always present administrative problems there is an obvious question whether a First World tax system, including a progressive income tax and other characteristic features, is really the best choice for India, or whether more emphasis should be placed on VATs and other lower-tech measures. (Although thought of as regressive in the West, VATs can actually have a progressive impact if the taxable sales are concentrated in the upper levels of the economy, and if the receipts are spent for redistributive purposes.) The new budget does little if anyting to address these issues.
As always, the comparison between India and China is an interesting one. (When I was in India a couple of years ago, you could get anyone's attention by making the Chinese comparison.) China has, at least on paper, a somewhat more steeply progressive income tax than India with rates of 5 to 45 percent, a 17 percent VAT, and business taxes that vary according to the particular activity and the location. But China is probably 15-20 years ahead of India in economic development, so that it is in theory in better shape to collect substantial revenues from the income tax, which tends to be paid by people at more than a subsistence level of economic existence.
Indian tax policy raises interesting issues for other developing economies. In a recent article Richard Bird and Eric Zolt argue that progressive income taxes are not generally speaking a particularly good way to effect income redistribution in Third World countries, since they tend to require a large amount of administrative resources and simpler taxes (well-designed VATs, for example) can effect some of the same policies at a greatly reduced cost. As a general rule, this argument makes sense to me: it seems to me that many countries have an income tax for the same reason that they have steel plants or a car industry, i.e. essentially prestige, and could probably due better off without it. Whether the theory applies to India, which remains a developing country but has an increasingly large "First World" sector and a relatively sophisticated tax administration, is less certain: indeed I am not sure the authors themselves would apply it in this case. But it is surely true that the income tax reaches only a relatively small percentage of Indians, and is likely to do so for the foreseeable future: the principal issues of progressivity and social justice are thus likely to be determined elsewhere, as the new budget appears to concede.
For those who are doing research on taxes with India, there are a number of useful sources, most of them thankfully in English which is the principal tax language in the country. The website for the income tax administration is www.incometaxindia.gov.in although, like the IRS here, it tends to have mostly technical information. A good place for making research contacts is the National Institute for Public Finance and Policy (NIPFP) which is located in the south of New Delhi near the Jawarhalal Nehru University. The website, www.nipfp.org.in, is reasonably well organized: by paging through the research and faculty sections you can get a decent idea of who is doing what, or else just e-mail the director and ask who is expert on your specific issue. R.C. Chelliah and A. Bagchi of the Institute are among the grand old men of Indian tax policy although there are also many younger people who may be of help on various issues. There is also a very good library which can help to orient you if you actually decide to visit.
There are numerous works on Indian taxes although these tend to follow the rather rigid division between law and policy that is typical of many foreign countries. Among the more useful ones are M.M. Sury, Income Tax in Theory and Practice (New Century 2002) and a collection, Tax Reforms in India (P.T. Chaudhari ed. ) (Shree Niwas 2003). There are also a number of interesting books and pamphlets available from the India Tax Foundation (e-mail at last check firstname.lastname@example.org) and books too numerous to mention on the general Indian economy and reform process. Many of these books can be purchased online from Indian booksellers although they are frequently much cheaper, as curiously are western texts, in India itself. Up to date tax rates and related information are listed at www.madaan.com (other sources are sometimes out of date), while a good place to follow current "big picture" developments is www.financialexpress.com (the regular newspapers tend to emphasize the private lives of Indian movie stars which are entertaining but won't further your research agenda). If you e-mail me at weissliv.comcast.net I can try to give you additional names and contacts (Government officials, private attorneys, etc.) which may help you but which I don't feel comfortable revealing to my entire readership, now surely in the, oh, two to three million range.
If you call India, do remember the unusual 9 1/2 hour time difference (a symbolic way to declare independence from colonialism) and, if arriving at Delhi Airport, have your hotel send an air conditioned taxi to meet you. India is generally pretty safe, but flights tend to arrive on the late side of midnight, and the airport is in an isolated area. Visa and vaccination requirements are easily available on the web.