DEVELOPMENT-INDIA: Gujarat Tax Unfair to Taxpayers, Say Critics

By Ranjit Devraj Reprint | | Print |

Ranjit Devraj

NEW DELHI, Feb 5 2001 (IPS) - A “punitive” income tax surcharge imposed by the Indian government in the name of relief for quake- hit western Gujarat state is an unfair burden on the small fraction of people who pay taxes, critics say.

Economists and opposition political leaders say the brunt of tax surcharge will be borne by the two percent among India’s one billion people who actually pay income tax — one that they say is not likely to benefit the really needy anyway.

When Cabinet spokesperson Pramod Mahajan announced the “extraordinarily punitive taxation step” following a special Cabinet meeting last week, he contradicted an earlier statement by Finance Minister Yashwant Sinha that the devastating temblor did not call for any special taxation measure.

The two percent surcharge on personal income and corporate tax will be imposed on the narrow base of mostly salaried taxpayers from April, when the new financial year begins.

Prime Minister Atal Bihar Vajpayee has also warned of fresh levies when the annual budget proposals are made on Feb. 28. “Two percent additional surcharge is not enough in view of the magnitude of the devastation in Gujarat,” Vajpayee told reporters Saturday.

But he admitted that other ways of mobilising resources would have to devised for reconstruction and rehabilitation work in the Jan. 26 quake, whose death toll is now projected at 35,000.

Outspoken Defence Minister George Fernandes has said that more than 100,000 people may have perished in the earthquake, though this has been disputed by other leaders. However, most agree that some 500,000 people have been rendered homeless.

The government has estimated at five billion dollars the damage caused by the quake.

India has applied for loans worth 1.5 billion U.S. dollars from the World Bank and the Asian Development Bank to help with relief and rehabilitation work. The surcharge, in comparison, will raise a bare 283 million dollars.

“The government should widen the tax base from the existing 21 million taxpayers to at least 50 million,” said R.N. Lakhotia, a leading tax expert and consultant to the Federation of Indian Chambers of Commerce and Industry (FICCI).

“Instead of widening the tax base, the government is collecting taxes again and again from existing taxpayers,” Lakhotia said.

His opinion reflects the view of many who accuse the government of reluctance to take the unpopular step of getting more of India’s one billion people into the tax net.

“Whatever is the problem in Gujarat. it is certainly not a lack of funds,” Bibek Debroy, an economist with the Rajiv Gandhi Foundation said of the surcharge.

Many Gujaratis, reckoned to be among the wealthiest ethnic groups in India, have refused to accept cheques distributed as relief by the government. They have organised their own relief through websites and by tapping into a large and well-to-do diaspora in western countries.

“Rather than impose another special surcharge on taxes on top of existing ones, the finance minister should think of improving tax collection and widening the tax base,” commented the ‘Indian Express’ newspaper in an editorial on the weekend.

“The surcharge raises the question of whether special taxes levied during national emergencies should be allowed to become a permanent feature and a substitute for tough resource-raising efforts,” the ‘Express’ commented.

At an all-party meeting convened by Vajpayee on Saturday to discuss the handling of the Gujarat quake crisis, the opposition Communist Party of India, Marxist (CPI-M) was vocal against the indiscriminate, “across-the-board” surcharge on all taxpayers.

India’s long-suffering taxpayers already pay 10 percent in surcharges, including one to defray the cost of an undeclared war fought with Pakistan in 1999 to expel armed intruders who had crossed over the Line of Control (LoC), which runs through disputed northern Kashmir state.

CPI-M politburo member Sitaram Yechury urged Vajpayee at the Saturday meeting to consider a graded surcharge scheme, depending on people’s capacity to pay. This, he said, would ensure that “the beneficiaries of the surcharge were the poor and that it was the rich who were made to pay.”

Yechury, who led a team of his party workers to Gujarat for a spot survey, said there was no shortage of relief material but that they were not reaching the really needy due to poor coordination.

Media reports spoke of rich landlords diverting food grains and relief material to private warehouses and attacking desperately poor villagers lining up on the highway near Bhuj, the worst affected town, begging for food.

Partners in the 21-party National Democratic Alliance (NDA), led by Vajpayee’s right-wing Bharatiya Janata Party (BJP), also expressed concern at reports of colossal mismanagement by Gujarat’s BJP government in relief and rescue operations.

“There has been poor distribution of relief materials,” complained Yerran Naidu, leader in Parliament of the Telugu Desam Party (TDP) which rules southern Andhra Pradesh state and is the biggest partner in Vajpayee’s coalition.

Under pressure from its own allies and opposition groups, the government was forced to agree Saturday to the creation of an all- party committee to monitor and help relief and rehabilitation in the aftermath of the Gujarat quake, said to be India’s worst natural disaster in 50 years.

There are fears that money collected from taxpayers in the name of relief and rehabilitation would get diverted by the government to other purposes — such as bridging a yawning 5.6 percent fiscal deficit which the World Bank and the International Monetary Fund (IMF) have repeatedly warned must be reduced.

“The two percent surcharge on ordinary tax payers will go to meet the fiscal deficit under the World Bank-IMF prescriptions,” said communist party leader K.N. Ramachandran.

“Going by past experience, the government is not clear on how exactly it should spend money raised for disasters,” says Ajay Kanchan, who was involved in relief work on behalf of Oxfam International in western Maharashtra state which was hit by a devastating earthquake in 1993.

“The government then withdrew 30 million dollars from the World Bank and for years afterwards kept the money lying around and paying interest on it,” said Kanchan, who now works for the United Nations Children’s Fund.

“Any surcharge levied should be clearly demarcated for relief work in Gujarat. Otherwise it will go into the central kitty and get mixed up with the entire consolidated fund of India,” Lakhotia said.