AUGUST 06, 2007

By G-bee

Dear Netizens,

Why should we talk about service tax (ST) and the goods and services tax (GST)? Is there nothing better to do for you and me? Why not instead read the latest Harry Potter book, take a walk in the rains, go to a party or listen to music. But then you get that.......nagging feeling. There is something sinister happening for the last couple of years. I really don't understand. They say the government is charging these new taxes. Why should it? Am I not paying income tax, does the shopkeeper not charge me VAT in my bill, don't they not collect road tax when I register my car? Isn't it enough? And then why charge tax on service? I work in an office, my wife teaches in a school and my son has got an agency business. We all do some or the other services? You mean all of us would have to pay yet another tax? My maid also gives some services at my home. She cooks food, cleans the house, takes care of my grandson. Will she also have to pay tax?

Friend... lets walk together a bit to know what it is all about. I am sure together we would be able to de-mystify this irritant called the service tax. Well... death and taxes are inevitable. But then, even the worst fears ameliorate if we know what is behind the curtain, because as they say 'fear is only that of unknown'. I know that there are several books written by erudite authors, which would make you very knowledgeable about this tax... the law, the judicial pronouncements, the government direction, garnished by authors own wisdom. But you know what? I am a very lazy chap. Those thick books (that too with volume one, two, three and so on) scare me. The tax itself is frightening, the weight of the books makes its further awesome. So with due respect to the great pundits, lets us leave those scholarly efforts and try to wade through this jungle, slowly and steadily, step by step. This is the idea behind my starting this column.

Ok.... are we ready? In that beautiful movie called 'The Sound of Music', there is that famous song called .... 'Doe a deer...a female deer..'. The song starts with some very useful advice. It says....Let's start at the very beginning. A very good way to start.' I think we should follow that.

By the way, would you agree with me if I say that we (I mean the Indians) are one of the less-taxed people (that is, if you count out the oil rich countries, some tax havens and some small economies)? 'Ha..ha', you would say mockingly, 'what a joke'. 'I pay so many taxes that it gives me a feeling that I am earning only for paying taxes to the government'. But friend, if you don't believe me, please pick up any economics book on fiscal studies or ask your economist friend. You would then shake your head knowingly and argue, 'I know how you are going to justify your statement. Everybody knows that many people live in village...poor...below poverty line. They don't pay taxes. So put all that huge number of non-taxed population in the denominator and conclude that we are one of the least taxed countries.'

But dear friend I am not talking about the averages. I am talking about you. A typical upper-middle-class-urban-complete-man (sorry, ladies I used that expression because I believe that you are intelligent enough not to read this column). You pay income tax on your earnings (by the way since this tax hits you straight on your nose.. it is called the direct tax) taxes like customs duty, excise duty, VAT, octroi, on goods you use or consume (which hits the person.. the importer, the manufacturer or seller,.....standing in   front of you. He falls on you, hitting your nose. Therefore these are called the indirect taxes). You would agree that rates of these taxes have gone down over the years, and that now they are reaching to the same levels as that in the major economies of the world. The taxes that you pay have rates that are either less than or nearly same as what your friend in Singapore or California pays to the government.

The issue of huge non-tax paying denominator that you raised in your argument is however, a valid one. Given the fact that we have so many unfortunate people who find it difficult to make two ends meet, let alone pay taxes (and some fortunate ones, who have enough to meet all ends for next few generations, but are such noble men that mundane things like paying taxes do not cross their mind) government is like the Oliver Twist, always asking for more. But government is not helpless as Oliver Twist. It can get the money required by putting taxes on its citizens. But it is a matter of choice...what should be taxed....who should the tax.... how much should be taxed. Mind you, the 'choice' is not an easy one, especially in a democratic country where the legislators have to stand before the citizens periodically, requesting for their votes.

The choice made during first few decades after independence of our country had a 'Robin Hood' touch in it. It was euphemistically called the 'socialistic pattern of society'. Wealth, profit, conspicuous consumption, luxury goods, foreign goods were considered bad words, and citizens belonging to high income group were to be 'officially' (on personal level things were different) treated as shrews, who need taming. Therefore, somebody having huge profits or earning good amount of income were required to pay income tax of above 90%. Foreign goods were anathema, and they could enter national economy only after their purification, by paying customs duty touching over 300%. Use of lipsticks or air-conditioners, even if made in the country, were to be considered as the 'vulgar' display of wealth, which needed to be checked by putting under an excise duty above 100%. On the top of it, every economic activity needed nod from the bureaucrats (press often sarcastically calls them babus, but I won't use this word as in my mother tongue, the word 'babu' is used either to express love or respect). But then this actually made some rich people, importers or manufacturers happy. Normally, scarcity causes the owners of the scarce item richer. It creates a wide gap between those shrews who can be tamed and who can't be. So with 90% income tax, if you pay tax and I don't, you would be left with ten rupees while I will have 'nearly' the entire hundred rupees. 'Nearly' is used here as one would have to share his booty with the law enforcer, the tax officers who would gladly guide you to be out of the taming process for a price. Similar was true for taxes on the goods. So while there was 'redistribution of wealth', unfortunately it was not so much between the rich and poor as it was between the rich and rich. Though a well intended one (which did yield some results), our Robin Hood unwittingly started protecting the riches.

As an economist can explain you better, such taxation system made India a 'High Cost Economy'. What this jargonized phrase actually means is that doing business in such an economy requires more money, is risk prone, gives less return and gives you sleepless nights. So as we considered 'Videshi', 'Punjipati' as sinful words, such entities also thought it better to maintain a distance (except through illegal night escapades).

In the mean time, the growing 'Oliver Twist' was feeling more and more hungry. Though it kept squeezing those bad elements for food, it would often go hungry in the night. It started dawning upon many thinking individuals that the situation is getting from bad to worse. Something had to be done.

See you soon.