A week may be too long a period in politics but four months are too short for meaningful and comprehensive economic reforms. It is in this sense that the Narendra Modi government is up against time.
Economic historians and commentators may talk back and forth about the governments hits and misses in the past five years but what is important is for the government to leave a firm imprint in the minds of the people that it had acted late than never. But these must be altruistic measures, the ones benefitting the entire nation.
First, it must bite the bullet and bring petroleum products within the habit of the goods and services tax (GST). Nobody bemoans seriously the failure to bring in real estate and liquor within its ambit as much as the failure to bring petroleum products under GST.
As much as 50 percent of the petrol bunk price of fuels is accounted for by central excise and state VAT on this hugely sensitive product that has a cascading effect on a wide range of product and services prices.
The argument that the high taxes collected from petroleum products are justified if only to bankroll welfare schemes meant for the poor is specious especially given the fact that high taxes on petrol and diesel hit the poor more than others. The cascading effect of high fuel tax is too real to be labored upon.
Second, income tax is a burden the lower middle class must be spared from. There should be no income tax on individuals whose income does not exceed Rs 5 lakh. Period. That the rate of tax on taxable income up to Rs 5 lakh is only 5 percent is no argument. As it is, Section 87A is very niggardly. It says tax rebate is equal to Rs 2,500 or the actual tax whichever is less for those whose total income doesn’t exceed Rs 3.5 lakh.
The government must ungrudgingly and wholeheartedly give tax relief to the people in the bottom of the heap. One is unable to understand why the government is hell-bent on collecting something from the lower middle class when it has ample opportunities to tax the well-heeled.
Third, wealth tax and estate duty must be revived. This would not only make up for the loss in revenue from petroleum products if brought under GST but also send a powerful political message that the Modi government is not serving the interests of the rich at the expense of the poor.
There should be a wealth tax of 2 percent on net wealth in excess of Rs 3 crore. There should be no exceptions made, no invidious distinction made between productive and non-productive assets. In others words, the market value of all the assets in an individual’s possession should be added up without discrimination.
Thus if a person has a net wealth of Rs 5 crore, the wealth tax he would pay would be 2 percent of Rs 2 crore i.e. Rs 2 lakh. Likewise, inheritors must be made to pay a price for inheriting like some states in the US do. Quite a few states impose a stiff 50 percent inheritance tax.
There is no reason why all inheritances in India should not be subject to an inheritance tax of 10 percent. To wit, if a person dies and leaves behind five inheritors, each inheriting Rs 5 crore worth of property, each one should be called upon to pay Rs 50 lakh as inheritance tax. Thus the aggregate inheritance tax collected would be a healthy Rs 2.50 crore.
In India, we have had estate duty which is a tax on the estate. This should be tweaked to tax the inheritors. Inheritors inheriting illiquid properties may have difficulty in paying the tax. For example, if one has inherited land and buildings and nothing else, how will he pay the tax except by selling the inherited property?
This can be addressed by allowing the inheritor a couple of years so that in the meanwhile he is able to acquire liquidity. Of course, interest clock would tick in the meanwhile.
Fourth, the government should immediately ban cash donations. Right now it is permitted up to Rs 2,000 and that encourages splitting of even huge cash donations into thousands of units of Rs 2,000 each. Banishing shady cash transactions has its origins in cash political donations.
Lastly, no amount of loan waivers is going to ameliorate the lot of the farmers. What is needed is boosting their income and making farming viable. Small and marginal farmers are not properly organised or equipped.
The government must play a catalytic and facilitating role in organising them into producers’ cooperatives with pooling of land becoming the cornerstone of the whole exercise. Producing on large scale on commercial and scientific basis is the key. AMUL is a shining example of the success of producers’ cooperative.
All the five measures listed above are doable in the short time between now and the announcement of dates by the Election Commission.