The Two Per Cent Excess

IT'S a bitter irony. Along with the unprecedented global aid in cash and kind, the quake victims were last week rewarded with another unexpected government move: a two per cent income tax surcharge to net Rs 1,300-1,500 crore. All in the name of quake relief!

As a result, the state of Gujarat will pay out at least Rs 100 crore more as income tax this year. And the burden has been slapped at a time when most taxpayers nationwide are going through a severe funds crunch—February and March are the months they face the maximum tax payout as well as investment needs. In the case of quake victims who don't have a roof over their head, well, they can probably pay it out of the PM's relief offer, provided it reaches them.

If the unkindest cut has come for the Gujarat taxpayers, the rest of India's three crore citizens who constitute the honourable taxpaying community aren't happy about it either. In fact, most are downright livid. So are many independent policymakers and government economists, not to speak of nda allies.

"I am totally against the way they've done this. The government should indeed raise resources for the disaster, but this is not the way," says consultant-commentator Gurcharan Das. Adds Shashanka Bhide, chief economist, ncaer: "It doesn't make economic sense to have the surcharge. Already, surcharges are adding up to 12 to 17 percentage points in the tax structure, which is impractical."

It's a genuine resentment. Every time there is a calamity, natural or otherwise, the government takes the easiest course to bail itself out—the classic Nehruvian socialist way to tax an almost-stagnant group of people, mainly middle-class, who'll pay without a murmur. And this time, the government almost went back on its word—barely a day after Finance Minister Yashwant Sinha denied the need for a surcharge, the prime minister went ahead and announced it, along with a vision of darker days coming up. Says economist Bibek Debroy: "All the government needed to do was to waive the loans taken by the state." Why just loan waiver, if the government had just thought a bit harder and chosen to bite the bullet, it would have had to choose among at least a dozen other options, some of which we have listed in the chart above.

The Gujarat surcharge takes immediate effect—even though the ordinance was promulgated on February 5, the higher tax rates will now be calculated for the total income of a year that's almost over. The latest surcharge brings the final tax rate for the income slab of Rs 60,000-Rs 1.5 lakh, to 22.4 per cent. Of this, the various surcharges imposed over time add up to 12 points, that is, 53 per cent of the total tax they pay (see chart: Charge and Surcharge)! For people in the second slab, who commit the sin of declaring an income of Rs 1,50,001 and above, the tax rate now is 35.1 per cent, with surcharges comprising 17 points.

While these surcharges are imposed as and when disaster strikes, they are rarely taken off. The last two surcharges—for the Orissa cyclone and Kargil war—still continue. The Gulf War surcharge, imposed in 1990 to meet a shooting oil import bill, was taken off as many as six years later by the then finance minister P. Chidambaram. That was the year he announced his dream budget, bringing the highest tax rate down to 30 per cent.

And compliance shot up; even the tax base started inching upwards. Five years later, the Gujarat surcharge brings us back full circle, with tax rates climbing up to pre-reform levels (for corporates, the final tax rate is now close to 40 per cent).Says Das: "It was heroic of Chidambaram to bring down tax rates to increase compliance. And that happened. But this government, which talks of second generation reforms, has actually undone the first generation. It's an unhealthy practice to frequently tamper with the tax structure as it disturbs the balance in economic planning. It's a big shame for the country."

Several experts also question the need to impose a surcharge—do we need funds over and above the huge amounts of relief that has poured in from all corners of the globe and inside the nation (see chart, page 60). They do agree that it is every citizen's duty to chip in for a disaster of this magnitude, but strongly feel that to raise an extra Rs 1,300 crore through the budget is a definite and devious over-reaction.

Says Debroy: "The Gujarat quake is not a resource issue at all. Apart from all the aid that's flowed in, the state is clinically urban and has plenty of resilience and wealth to help it bounce back." Gujarat, after all, had close to 10 per cent growth per annum over the nineties, the highest among all states. Adds Das: "For the prosperous Gujarati community, it may well turn out a temporary setback. I give the state six months to return to normalcy."

And they are not being unkind. After two weeks, the Central government has come out with a figure of Rs 21,000 crore as the total loss due to the quake. This includes Rs 8,000 crore for damage to industrial units and commercial establishments; Rs 1,100 crore for damage of houses and buildings; and Rs 1,875 crore for damage to public property. The government's figure compares well with the estimate put out by ficci, of Rs 25,000 crore. As against this, the flow of funds, including global aid, has already reached Rs 20,000 crore.

Now, in fact, there's worry and talk of resources being misused and diverted from quake rehabilitation. To counter this, a better move would have been to put in place an adequate and automatic disaster management mechanism. Says Ashok Lahiri, director, nipfp: "That was an obvious thing to do. You don't need an earthquake in Gujarat to think of such a mechanism. This should have been done naturally. Ad hoc measures like the surcharge don't work. There is a need to find a much more durable solution to crisis situations like this."

The government's knee-jerk reaction has set tongues wagging that all is not well with the government's balance-sheet. And what better way to raise resources in a year when, because of a continuing demand and production slowdown added with import dumping, revenue earnings are feared to have fallen way short of target? Says economist Sudhir Mulji: "It seems to have nothing to do with Gujarat. True, every calamity puts pressure on the budget. But the government, desperate to raise its revenue to protect the fiscal situation, sought to impose a surcharge. What the government is not looking at is its consequences on the present situation—whom are they taking the money from, in what way, and will the money benefit the economy? It is simply bad macro-economic management."

Meanwhile, the middle class continues to get the rough end of the stick. Says Lahiri: "In India, typically, money is mobilised not only from people who have it but also from those from whom it can be easily collected." Notably the salaried class. Quips Debroy: "After making concessions for people in agriculture and those below the exemption limit, all we have is 25-30 million people who are forced to take the entire I-T burden in a country of one billion."

Mulji feels the government has few options because of the exclusion of some of the most affluent classes of people from the tax base. "The politics of this country has forced us in a certain direction. We have been forced into a situation where the only way open is to raise taxes. But the government had at least three options before it: printing money, borrowing more or raising tax. Now that it has opted for the last, the government should manoeuvre such that interest rates go down and liquidity is created. That would solve a lot of problems."

Some other options are taxing agricultural income, charging administrative prices—reducing subsidies, in other words—and a proper, speedier implementation of privatisation, reduction in government's non-plan revenue expenditure, a temporary quake cess and low-paying but tax-free bonds to which people would have easily responded. Tapping black money is yet another one. Says Das: "The government should think practically. It should announce a tax amnesty scheme for quake donations."

And how can the government ensure that taxpayers' hard-earned and har-der-sacrificed money will actually reach the targeted people? It can't, really. Says Debroy: "Constitutionally, all tax proceeds have to go to the Consolidated Fund of India and cannot be earmarked otherwise. To change this, one has to amend the Constitution." Mulji agrees: "The calculations on such funds are always dubious. One can never be sure." Doubts that will linger on in the people's mind even after ravaged Gujarat has hopefully bounced back to normal life.