Talk of the theory of unintended consequences. The late Harshad Mehta would never have dreamt, in his brief moments of fame and notoriety, that his actions would lead ultimately to the potential reform of India's tax system.
Readers may recall that, in the wake of the Mehta-sparked stock market scam of the early 1990s, and growing frustration with the broker-led (and broker-fixed) Bombay Stock Exchange, the government went ahead with creating the National Stock Exchange as a rival body on a completely electronic trading platform.
There followed the National Securities Depository and many sweeping changes in stock trading (dematerialisation, demutualisation, no-delay rolling settlements, and so on), all of which have created in India a stock trading system that compares with the best in the world -- and in some ways is better than what other countries have.
But our subject today is tax reform. The spin-off effect of the reform of the stock market was that India created new institutions that could handle vast volumes of data and transactions on a real-time, networked basis, as well as the software for the job.
Once you do that, of course, these abilities and institutions and software packages can be turned to fix other problems. Like our creaking tax system.
The genius of the Vijay Kelkar committee that looked at the administrative mess and corruption that marked the tax collection machinery, was to turn away from the old police methods that had been tried and failed, and to seek solutions belonging to the modern day.
To his credit, the then finance minister (Jaswant Singh) was also looking for solutions that treated tax-payers as human beings who should be treated in a civilised way, not as random suspects fit for Abu Ghraib.
Enter Harshad Mehta's unintended children, and the use of IT by modern organisations as the solution to administrative problems.
The Tax Information Network that has now been set up by way of implementing the Kelkar proposals on administrative reform (and these are quite different from his proposals on tax structures) has already begun to deliver dramatic results for Jaswant Singh's successor.
By setting up a network that will track the tax deducted at the source of a range of transactions, and correlate that with millions of individual tax returns, the TIN has closed a massive information and tax evasion hole.
Result: Income tax collections in the first half of this financial year have shot up by an unprecedented 74 per cent (the Budget provides for only 25 per cent growth).
Indeed, the full year's target increase of about Rs 10,000 crore (Rs 100 billion) has been achieved in the first half of the year.
This gives real life to Dr Kelkar's hypothesis that tax compliance in India has improved substantially, and that going further down this road will sharply increase the ratio of direct tax revenue to GDP.
No need to jack up tax rates, and no need for draconian police powers to be given to tax officials.
Now the TIN will be turned to a variety of indirect taxes, where there is as much if not more scope for plugging tax evasion. The collection of excise is in a sense an easier task because 80,000 companies account for the bulk of excise revenue.
Creating a TIN for this purpose will also facilitate moving to a full-fledged value-added tax (VAT) system that includes services, which typically are more prone to leakages because it is a less organised sector than manufacturing -- because an electronic system will track every step of a transaction chain (thus providing for accurate set-offs that are at the heart of any VAT system).
Also, the states have now seen the light. Everyone knows that there are massive sales tax leakages taking place in all the states, but so far no one has been able to plug the holes. The TIN could be adapted and used for the job; in fact, some states seem to have moved on the idea already.
The 'realists' will scoff that you cannot find electronic solutions to problems deep-rooted in our economic and political system, and the equally deep-rooted reluctance to pay tax.
But if one of the central challenges today is to improve the quality of governance, it seems an entirely feasible idea that we can marry information technology with effective new organisations to find solutions to seemingly intractable problems.
