Monday, July 19, 2010

The 10% Rule

India is a land of big disparities. India ranks among the select few in having the most number of billionaires but also tops in having the most number of poor and unprivileged. While six cities churn out 90% of the Indian IT products, 70% of Indians toil in the country sand and more than 50% barely make a living. These disparities keep on growing, if one looks at the nation state wise and get even worse with finer analysis of data, district wise. The regions lagging behind in the Shinning India story face the danger of further neglect as the government busies itself with the more visible India.
One of the common threads joining these impoverished, forgotten areas is the lack of any public amenities, be it water, electricity, roads or connectivity. I question the moral authority of the government in levying tax on people and activities in this area. Tax is a kind of a service charge paid to the government for providing services and amenities useful to all, like building and maintaining roads, taking care of people's health and education, and maintaining law and order. If the government fails of multiple counts in these areas, isn't it amoral for it to ask people to pay for the services it never provided?
I propose that the government should levy 0 taxes on any person living in or any economic activity occurring in 10% of the most impoverished districts( blocks would be even better) of India. As rare it may be, this moral grumbling also makes a lot of economic and political sense. The major part of government revenue comes from the affluent cities and urban centers of India. The 10% of the most impoverished districts would not contribute a great deal to the revenue or else they would not be that impoverished. Thus the government will not lose a lot of revenue, but create a great impulse for the industry to set up shop there. It would be attractive for professionals and trained personnel to settle in such areas for the lack of income tax. If the sales tax is also lifted from these areas, it shall lead to a better quality of life for the ordinary citizens in these areas as their purchasing power increases. With the increase in the purchasing power, there shall be a corresponding increase in the economic activity in the area and it may be able to join the Indian growth story.
It would be worth considering for the central and state governments to have a differential approach for levying taxes in various regions with the 10% of the most impoverished districts of India free of any central tax and 10% of the most impoverished blocks in every state free of any state tax and have a gradual slab based approach for other regions. Such incentives have been provided to Special Economic Zones (SEZ) in India and China and these areas have seen a boom in economic activity, so much so that exports from 111 operational SEZs in India contribute to around 58K crore rupees worth of exports and they have grown 112% in the last year and 67 % this year. This is a easy to implement tax rule with low chances of misuse and little loss to the government.
The Indian government is at crossroads on many policy decisions. I feel it would be a mistake to follow a uniform tax code with a uniform Goods and Services Tax (GST) for all regions in India. What we need instead is the approach taken while levying taxes on individuals. We need to divide the whole country into groups of districts with each group containing areas with similar economic standards and the membership of each group automatically updated annually. Uniform taxation should be followed within each group, with current taxation rates on the most affluent group and nill on the most impoverished one.

PS: Creative use of taxation can correct many ills in the direction and pace of Indian economic growth. Another such problem that could be ameliorated, though not solved, by smart taxation would be the lack of skilled persons and proper training in India and the low employability of many graduates, with the government exempting all trainees in industry, who were previously unemployed and just graduated, from income tax for a period 6 months in urban areas and an year in rural areas.

Thanks again to Anirudh for editing the post.


  1. nice idea somit...liked it

  2. I m heading back to Shimla if this happens :-)

  3. Thanks for the appreciation. I do seriously believe that taxation in a area or field should be linked with the contribution of the government to that area or field.
    Don't think Shimla would have a lot of tax concessions according to this scheme. But would be better than Mumbai, Bangalore, etc.

  4. It seems, at present the states with lower levels of income have higher tax rates as comes out from the GST debate.
    "Broadly, there are two kinds of states – those that are affluent, where the pattern of consumption is high and those which have large reserves of minerals but are poverty-stricken and where consumption is low. GST will help the former category of states earn more money. But the latter category, while being affluent, will have low-end point consumption and will not be able to collect GST in proportion to its riches."