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India commenced with a broad-based tax reforms programme in 1991 as an important part of the economic reforms process. Simplifying tax structure, cutting rate of taxes, enhancing tax compliance and broadening the tax base are the major contours of this reform programme. But even today, India has not fully translated its democratic vigour into commensurately strong fiscal capacity. The tax base of India is still not adequate. To build fiscal capacity it is essential to create legitimacy in the state. In this regard the latest Economic Survey 2015-16 has presented a very timely and suitable piece of analysis. The document adds that to build fiscal capacity the government needs to put in place a better tax regime which is only possible once the government is able to enhance its legitimacy among the citizens. The suggestions24 forwarded by the Survey in this regard are briefly being given here:
(i) The spending priorities of the government must include essential services which are consumed by all citizens. For that matter, action needs on public infrastructure, law and order, less pollution and congestion, etc.
(ii) Reducing corruption must be a high priority. Though this will be
fiendishly (clever and imaginative) difficult. This is needed not just because of its economic costs but also because it undermines legitimacy of the state. The more citizens believe that public resources are not wasted, the greater they will be willing to pay taxes. Improving transparency through efficient auctioning of public assets will help create legitimacy, and over time strengthen fiscal capacity.
(iii) Subsidies to the well-off need to be scaled back. At present25, it is estimated to be around Rs. 1 lakh crore. Phasing down these bounties and targeting subsidies for the poor is important in strengthening legitimacy.
In the same way, the existing regime of tax exemptions redistributes income towards the richer private sector—it dilutes the legitimacy of the state in the eyes of the poor citizens. There is need of putting in place a reasonable taxation provision for the ‘better off’ section in the country regardless of where they get their income from— industry, services, real estate, or agriculture.
(iv) Property taxation needs to be developed. India lacks systematic data on property tax and whatever is there it is very sparse. This proves the low attention the country has given to this issue. As property taxes are ‘progressive’ they are desirable. It makes more sense because evading this tax is difficult as they are imposed on immovable (non-mobile) assets. With the help of today’s technologies such properties can be easily identified.
Higher rates on properties (with values updated periodically) can be the foundation of local government’s finances. This can provide local public goods and strengthen democratic accountability and more effective decentralisation. Higher property tax rates would also put sand in the wheels of property speculation. Smart cities require smart public finance and for India’s urban future a sound property taxation regime will be vital.
One low hanging fruit is to avoid raising exemption threshold and allow natural growth in income to increase the number of the taxpayers. The Survey has suggested a simple method for it—inaction. The Union Budget 2016–17 has already begun this process—exemption limit for individual income tax
has been left unchanged together with a programme to link corporate tax cut and phase out of the exemption regime existing for the companies.