Budget Ruminations: How to Disburse Subsidies

Although the statistics of the Income-tax department in our country show that the number of taxpayers on its rolls has now increased to more than 84 million, only 1.13 per cent of our population about 15 million) actually pay tax. The rest get away by claiming deductions which reduce their incomes below the exemption limit. So one major challenge before the present government is to find ways to make more people make the fiscal connection between taxes and public spending. This is possible only if more people from the middle class begin to pay taxes

RECENTLY, PRIME MINISTER Narendra Modi made a telling point: taxpayers, he said, resent their hardearned income paid as tax being wasted on freebies, but are ready to pay even more tax, if revenues are genuinely used for uplifting the poor. Implicit in this statement are three important thoughts for fiscal reform for consideration of the Finance Minister in the run up to the forthcoming Budget.

The first of these takes me back to the freezing January morning of 1992, when Alan Lewis, our professor at the University of Bath and an international authority on fiscal psychology, invited our attention to one of his studies. Taxpayers the world over, he pointed out, demand all kinds of freebies from their governments better hospitals, schools, unemployment allowances, old age pensions, etc. Their enthusiasm wanes considerably when they have to pay higher taxes to obtain these benefits.

PUBLIC REVENUE PUBLIC SPENDING

Prime Minister Modi appears to have emphasised this very point: Taxpayers who wrote to him were able to make the required fiscal connection between public revenues and public spending.