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Business Commentary/Dilip Thakore

Taxes and the citizen: Brittle social contract

This time you can't blame the lay citizen looking for ways and means to stay afloat in an era of rising prices and persistent price hikes of the government. It's the Government of India which has opened up the great tax debate with its bold 'Why should I pay taxes?' television campaign to flog its Voluntary Disclosure of Income Scheme which closes on December 31.

Unlike most government advertising campaigns, this particular campaign which promises those who declare concealed income and pay 30 per cent income tax thereon 100 per cent peace of mind, has a professional touch about it. Certainly it sets one thinking. And there lies the rub. Because the net impact of the campaign is that it is likely to have the opposite of the intended effect in as much as it provides a substantial argument in favour of income concealment and tax evasion.

For the benefit of the small minority who may have missed the campaign as depicted on television, the ads feature several obviously successful businessmen questioning the rationale of paying taxes when all one gets in return are pothole roads, power outages and other infrastructure failures. 'Tell me why should I pay taxes for all this?' asks the protagonist in each of the ads. And instead of answering this valid question, a voice over dismisses it as one of may 'excuses' unlikely to pass the test of sensitive conscience.

Yet the plain truth is that the question posed by the protagonists in the ad campaign are not excuses but valid arguments demanding a considered reply. The implicit social contract between citizen and the State is that the citizen pays taxes imposed by governments in exchange for a set of basic services and also for the government to act as a trustee to invest a significant proportion of taxes collected into projects likely to benefit the poor and disadvantaged. On both these counts, governments at the central and state governments are increasingly failing to deliver endangering this implicit social contract.

The obviously unforeseen perniciousness of the government's VDIS ad campaign is that it actually admits that the State has failed to provide a half-decent infrastructure to wealth-generating citizens who have succeeded despite lack of support from government institutions. The question as to why citizens should discharge their obligation to the State while the latter has admittedly failed to discharge its obligations is glossed over. This is the infirmity of the ad campaign. It fails to provide comfort to increasingly reluctant tax payers that the government is conscious of its sub-optimal performance in creating an environment which facilitates the wealth-generating activities of businessmen and that it is determined to do better.

Little wonder according to all reports the response to the VDIS scheme has been poor and that thus far barely Rs 500 million ($ 14 million) has been raised. Wisely, the finance minister has not included any specific amount collected under the VDIS scheme in his budgetary calculus for the current fiscal year. Consequently, any amount garnered under the scheme will be credited as a bonus to the treasury and will contribute towards containing the fiscal deficit to the all-important figure of 4.5 per cent of GDP.

And with industrial growth in the first quarter of the current fiscal down by almost half compared to April-August 1996, the chances of the national income rising by the budgeted 7 per cent are getting slimmer by the day. The inability to attain his rate of GDP growth over the year will mean a shortfall in tax collections. Moreover, the government has been over-generous in upping the payment to its own employees by over Rs 71 billion ($ 1,970 million) against the budgeted amount. In short there is every likelihood of a large gap between the Union government's revenue and expenditure emerging by the end of the current fiscal year. Which means that the finance ministry must ensure that VDIS is a big success if the fiscal deficit is to be contained as budgeted.

This is why it is vitally necessary to make a mid-term correction to the VDIS ad campaign. The ads to assure citizens that government is determined to use the money collected from them by way of back and future taxes prudently to provide basic services such as law and order maintenance, infrastructure and that it is conscientiously working towards the attainment of the objectives articulated in the finance minister's widely acclaimed Budget and the United Front government's Common Minimum Programme.

The discernible breakdown of the law and order machinery all over the country, the unearthing of numerous multi-billion rupee scams and the government's susceptibility to pressure exerted by low-productivity public sector unions has aroused widespread scepticism within the minds of right-thinking members of society that their taxes will be put to any good use at all.

To glibly dismiss such legitimate misgiving of citizens as mere excuses is irresponsible. Weak and profligate government is leading to a breakdown of the social contract between tax-paying citizens and the government. Therefore if governments -- at the Centre and in the states -- want citizens to conscientiously pay their taxes, they will have to reassure them that tax revenues will be prudently spent for well-defined, articulated purposes rather than dispensed as arbitrary largesse to special interest groups. That's what a new, revised VDIS ad campaign needs to promise.

Dilip Thakore