Raising Revenue in the Time of Coronavirus

A report prepared by over 50 IRS officers provides recommendations for raising government revenues to respond to the COVID-19 crisis. Indian Policy Collective also has for you a response to these recommendations by BM Singh, former Chairperson of Central Board of Direct Taxes.

One thing both the Indian centre and states need - and are falling short of - when it comes to fighting COVID-19, and the subsequent humanitarian emergency and economic downturn, is revenue. FORCE (Fiscal Options & Response to COVID-19 Epidemic) is a 43 page report prepared by over 50 young Indian Revenue Service (Income Tax) officers which contextualizes, lists, and explains their recommendations on revenue mobilization and an economic impetus to fight COVID-19.  The report is being circulated among bureaucrats and policy professionals and has also been sent to relevant government offices. It’s been in the news. The Finance Ministry, however, has called it ‘ill conceived’ and, reportedly, initiated an inquiry against the officers behind this report. We have uploaded and linked the report and also, here below, is a summary of the short and medium term measures they have recommended to increase government revenue from direct tax (as well as some measures that may encourage a voluntary contribution to revenue and welfare).  Short term measures (3-6 months)

  • Taxing the Wealthy. Raising the highest income tax slab rate to 40% for total income levels above Rs. 1 crore per annum or re-introduction of the wealth tax for those with net wealth of Rs. 5 crores or more. 

  • Increase the surcharge applicable to higher income foreign companies having a branch office / permanent establishment in India.

  • To make the above measures more palatable for richer taxpayers (and for them to feel a greater sense of satisfaction at contributing in this time of crisis) place the revenue collected through these measures in a separate kitty funding 5 to 10 most crucial projects which will be made available to the public on a website with a live spending meter against each. 

  • An additional one time cess of 4% on those whose taxable income is greater than Rs. 10 lakhs per annum. 

  • Extending tax incentives for Corporate Social Responsibility (CSR), for companies undertaking COVID relief activities. 

  • Corporates may be allowed to treat salaries paid to their non-managerial staff during the COVID crisis as part of their obligation under CSR.

  • Contribution to CM Relief Funds should be included for purposes of CSR use by companies (as is the case with the PM CARES Fund). 

  • Investing CSR funds into PM CARES Fund and CM Relief Funds have to be incentivised in various ways. 

  • Further incentivising ‘contributions’ to PM CARES and CM Relief Funds, such as allowing the deduction under Section 80G over three years. 

  • A new tax savings scheme like Covid Savings Certificates (modelled on National Savings Certificates) to mobilize funds. 

  • A new amnesty scheme for collection of tax and penalty owed and pending (that is not disputed), waiving off the interest that has accumulated on it. 

             Medium Term Measures (9-12 months) 

  • Tax discounts and rebates in percentage points for timely compliances. 

  • Introduction of a tax like the United States’ Base Erosion Anti-Abuse (BEAT) tax on Multinational Enterprises (MNEs) with high average annual gross receipts. This will be an additional tax liability on payments to foreign related parties that erode the base of taxable income (eg. Interest, royalty). 

  • Reintroduction of ‘Inheritance Tax’.  

  • Tax on the capital gains arising out of inherited properties of Overseas Citizens of India (OCI) should be raised by 10% from the current rate because the inherited properties of the OCI and the persons holding them would have benefited from facilities and subsidies offered by the Government of India. 

  • Increase the Equalization Levy (a direct tax imposed on non-resident service providers who earn revenue, in excess of a threshold, from India— also called ‘Google Tax’) by 1%. This will largely affect web services/online streaming/e-commerce companies like Netflix, Amazon, Prime, Zoom etc. which are well suited to the ‘Corona economy’. 

  • The tax department should, through a ‘Give it Up’ campaign, encourage the super rich, and others who are willing, to give up one subsidy / tax concession / tax deduction for only a year (in the same way that people voluntarily surrendered their LPG subsidy benefits). 

The report also contains detailed recommendations on reprioritizing expenditure areas for the coming year. Further it contains sections on ‘taxpayer welfare measures’ (such as boosting consumption, supporting MSMEs, and tax relief for corporates - particularly the healthcare and service sectors - and facilitating COVID-19 relief by NGOs) and tackling tax evasion during this crisis.  The recommendations stem from research on the economic and revenue impact of COVID-19 on India, put forth in the beginning of the report and take into account comparative studies with other countries (to be found towards the end of the report).  For all of this, as well as more detailed explanations on the recommendations we have presented above, you can read the full report here:  https://drive.google.com/file/d/1R9HJtCN33T_xC0lYsB46H8V2l4wj_gMs/view NOTE FROM BM SINGH (FORMER CHAIRMAN, CENTRAL BOARD OF DIRECT TAXES): The government is currently faced with the difficult task of funding health infrastructure, welfare benefits, as well as a stimulus package for the economy in the wake of the pandemic and the resultant lockdown. In addition to that, the central government also owes thousands of crores in GST dues to state governments who are in dire need of the money to tackle the crisis. FORCE (Fiscal Options & Response to COVID-19 Epidemic) is a report prepared by more than 50 young officers of the Indian Revenue Service (Income Tax). They have released a set of recommendations for raising revenue in order to meet the financial needs of the hour.  The bulk of the recommendations on finding the money to fund India's response to this crisis focus on raising taxation at various levels. Given that the country is facing an economic downturn and economic uncertainty, raising taxes at this point will not only further cripple demand, it will also discourage investment - both domestic and foreign. My experience is that nations are often engaged in what we could call, for want of any phrase more expressive, ‘tax competition’. A lower tax rate is an important factor in attracting investors and coupled with ‘ease of doing business’ can tilt investment decisions in our favour. Furthermore, raising taxation at this point may also increase unemployment, creating a spiral effect. Incomes and profits are badly hit and an increased tax burden at this point can have a devastating impact. There is no denying that more revenues are needed but for that other solutions must be sought. For instance, there is some low hanging fruit which is being ignored when it comes to augmenting the states’ revenues. Opening of trade in liquor and tobacco may be frowned upon but it is perfectly legal and could yield welcome dividends to state treasuries. That said, the report does contain some valuable suggestions on taxation. However, in my opinion, the recommendations are ill-timed. These can and should be revisited at a later time, when the economy has stabilised to some extent and the health crisis is under control.  The government has distanced itself from this report, and rightly so. However, the recommendations should not invite censure or an inquiry from the government. This is a critical time in the history of our country and free speech and debate on policy matters must be encouraged. Also, the efforts of the bright officers of the IRS must be encouraged, irrespective of whether one agrees with them, because they have special skills in this field but are often ignored by the dominant IAS (Indian Administrative Service) who have a monopoly over decision making and are loath to part with their turf. It is only by encouraging policy recommendations from all quarters that we will be able to come upon the best ways to tackle an unprecedented and multi-pronged crisis.

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