Just Taxation System

KK Sharma State efforts in redistribution of wealth all over the world, translates into ever widening tax net, sale of shares in public enterprises or natural resources, and spending most of it on various social programs. Given our questionable project management practices and leakages at all levels, these measures often fail to achieve the desired objectives. Taxes, much despised by all, are the foundation of good governance and also key indicators to the welfare programs run by a government to provide for the poor. These also help to maintain essential social enablers health, infrastructure, transportation and education. To have a just regime of taxes is as much a function of the governance as to have a just, responsive and caring government. If the purpose of taxes is revenue for running a welfare state, then what can be termed as just tax system; and what is unjust in our country? Many argue that a capitalist structure is built on market monitored pricing system, which allows individuals to reap the dividends of their hard work. It is unfair and unjust to rob Peter to pay Paul goes the refrain. Fact is that in spite of aversion of all tax paying individuals; all countries collect taxes to ensure a fair distribution of wealth. Just 22 years ago, this was the heady argument of socialistic republics; but the myth exploded in late 90s with the demise of most Marxists regimes. Not that the theoretical constructs were wrong, but the people running these governments became fascists themselves. Alternative of course is to accelerate economic growth, thereby ensuring all get into some employment as per their capabilities and earn decent livelihood. Adam Smith propounded guidelines when analysing tax regime, in his Wealth of Nations. These guidelines are the foundations of most of tax collection systems, though many countries including India were collecting the tax even before such treatises were written. Smith laid down that subject of every State ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities. The tax each individual is bound to pay ought to be certain, and not arbitrary. Every tax ought to be levied at the time, or in the manner in

which it is most likely to be convenient for the contributor. Smith considered excise, customs and taxes on profits as either expensive to collect (excise) or disincentives to produce (tax on profits). He reserves harsh words for taxes which occasion the invasion of privacy, and on the subject of excise he says: "To subject every private family to the odious visits and examination of the tax-gatherers ... would be altogether inconsistent with liberty." Aim was to provide for a just taxation system, where everyone pays as per his capacity with least government intrusion. A study of ancient India, China, Latin America or African nations, reveals that like Adam Smith propagation; all countries primarily taxed land holding and its annual or periodical yield. Corporate tax came on the scene with industrial revolution. Looking at the corporate in the West and India, one finds all out efforts to avoid paying taxes and that is where clever accounting by trained accountants comes in. Corporate taxes are a significant item for revenue generation of the central government. The government gives tax sops to improve the performance of corporate with a view to increase its growth rates and net tax collections. Many studies on corporate tax reveal that SMEs pay higher taxes than many mid or large cap companies, a major consideration of Kelkar committee. Manufacturing sector pays the highest and financial sector the lowest, again hinting at the reason why services sector growth is at the cost of manufacturing sector. But the corporate contribution remains significant at Rs 3.6 trillion to the total above Rs 9 trillion tax revenues as per the last budget. The question discussed in various forums is, avoidance of taxes while availing all the services of a state. Tax havens are used by both, individuals and corporate. They provide facilities for people or entities to get around the rules, laws and regulations. Same havens are used to escape tax and are also widely used by criminals and terrorists. Tax havens perpetuate inequality and poverty, destroy democracy, distort markets, and undermine financial or economic growth, thus creating poverty on their land of operation. In India by all reckoning, billions of fund flow to FII comes through Mauritius and Singapore, but is permitted by the government. One wonders why the government is so lax on such a potentially dangerous and destabilising fund funnelling. Another form of unjust tax regime is huge numbers of self-employed professionals in service sector, virtually out of the honest tax brackets. By some estimates, Indian direct income tax should be three times the one collected these days, provided the population is honest and IT avoidance is made a cognisable offence like in the USA. A just taxation system ought to account for all citizens, paying as also receiving the welfare largesse.