India is a nation where, under current laws, only 3 percent of the citizens need to file an income tax return, and only 1 percent is actually found to annually have earned a taxable income. The majority of Indians, who are engaged in agriculture, are not required to pay income tax at all
The Indian economy and employment declined very sharply because of the Covid pandemic and is now inching upwards again despite external headwinds such as fuel price rise and supply chain disruptions. Inflation is very high and RBI efforts to cool it down will take several quarters to fructify. The pressure upon central government revenue is growing despite increasing direct tax collections because of rising infrastructure development costs, agricultural subsidies and necessary social welfare programmes.
The finances of states are in increasingly parlous condition. While exports are growing again, import growth has accelerated, increasing the CAD and depreciating the rupee substantially. Meanwhile, market volatility is not conducive to adequate domestic investment for the private sector to compensate the difficulties in government capital expenditure.
India is a nation where, under current laws, only 3 percent of the citizens need to file an income tax return, and only 1 percent is actually found to annually have earned a taxable income. The majority of Indians, who are engaged in agriculture, are not required to pay income tax at all. Now that the Jan Dhan account scheme has given banking access to most Indians, the time has perhaps come to ask all Indians, regardless of income, to file annual income tax returns if their annual income exceeds given limits.
Small tax base
Given the present exemptions, the number of taxpayers may not increase substantially, but the government will acquire an accurate estimate of GDP and increase its revenue. The informal sector of petty traders may be charged a fixed annual sum to bring them into the tax net. Leaving more disposable income in the hands of earners will amplify demand for goods and services, boost growth and employment and improve living standards.
One way to increase monetary resources and translate them into necessary infrastructure and productive activity could be to incentivise investment, particularly from the high earners in the agriculture sector, into sectors such as food processing, renewable energy and agricultural mechanization as well as new crops and horticultural products of higher value and demand. Investment incentivisation such as PLI schemes should be offered across all sectors.
Even retail investors can be encouraged by issue of fixed return infrastructure bonds. Such investment could be made income tax exempt to encourage UHNWI as well as other taxpayers to invest more.
Incentivisation of philanthropy
The second need is for the incentivisation of philanthropy, which is still at a very low level, although it was begun by the Tata Group in the 19th century. More recent philanthropists have been Shiv Nadar and Gautam Adani, who recently announced that he will donate 8 percent of his income to philanthropy.
Increase in philanthropy and proper use of CSR funds will enable the growth and spread of essential but non-revenue generating infrastructure such as schools and healthcare, which will give exponential returns in social and human development, while making the government capex easier for transport, defence, irrigation, rural development and others. Such philanthropy may be made partially or wholly tax exempt to promote it.
For those unable to work and earn because of disability or old age, the government may consider providing a basic income of Rs 9,000 per month to all BPL families. Surely, the government can set aside only Rs approximately 1 lakh crore annually to ensure that all Indians can afford their basic food, clothing, healthcare and shelter. This will free our minds and hands to engage in productive economic activity. I am sure the nation can easily afford this amount to bring all our citizens, including senior citizens and those unable to work and earn, out of poverty.
The government could also reduce its administrative load by making government salaries, DA/DR and pensions tax-free while continuing to tax other sources of income above the prescribed exemption limits. Adjusting emolumernts downward to compensate this will reduce the salary and pension burden instantly, leaving more funds in the government exchequer for defence modernization and other essentials.
It will also dampen inflation. encourage both household savings and consumption expenditure, augmenting both demand and supply, giving a fillip to economic activity. Banking software could directly alert both account holders and tax authorities whenever the holder’s annual income exceeds tax exemption limits and urge them to file returns and pay due taxes.
These may be some possible ways to augment government revenue, bring the whole of India out of poverty, develop necessary infrastructure and facilities in collaboration with the private sector, achieve the three goals of eliminating poverty and hunger, achieving Atmanirbhar Bharat and making India a USD 5 trillion USD economy in this 75th year of our independence from colonial rule.
(The author is a former Indian ambassador. Views are personal)