Tax - An outdate way of managing the Economic future of a Country

Common sense tells us that any expenditure that doesn't result in the creation of a long-term asset is not an attractive option. Most of the people and corporates do not like Taxes for the simple reason that they cannot see a tangible benefit because of it directly though most would agree that lack of them is going to cause a social unrest. Simply put, Tax is an expense for any individual / Corporate.

A traditional Fiscal policy revolves around managing the revenues by collecting taxes. Further, the capital investment made by private sector is manipulated by creating a Tax differential across industries. For eg., a lower taxes in IT industry will attract investments in IT Sector. This fiscal policy has an inherent flaw. By lowering the tax rate for IT industry, I am rewarding people who want to take risk. At the same time, companies who have been employing people for a long time and producing useful goods & services don't see any extra reward in continuing with their business at the same pace even though there is untapped market potential. Another disadvantage is that you can lower the tax rate yet not gain any capital inflows because of huge risks involved or because of lack of interest in the market opportunity. One such example can be the case of Micro Finance Institutions or Small Scale industries or Technology Start-ups etc..... The list goes on.

To have companies running in the above stated list, funds are required in large sums and govt cannot obviously have funds for all of them. And it cannot keep on raising taxes for higher revenues.

The basic problem that I am highlighting over here is the case of a govt that needs to have extra funds to carry out a number of its projects in its 5 year plans. One way is to fund them with taxes. The other way is to take loans. I propose a third way, i.e, seek equity participation of private sector in a compulsory way.

Lets assume that Corporate India pays 25% of its net profit as Tax to the govt. For simplicity's sake, govt. wants to focus primarily on building of Universities with world class research and this is the only focus of the govt. I suggest that the Govt, of India reduce the tax to 20% and charge 10% as Mandatory Equity Investment or Equity Convertible mandatory debentures. These form the capital of a new Special Purpose Vehicle whose sole objective is to invest in new Universities with Research as primary focus. Now, Govt can formulate a policy saying that 30% of the funds will be used directly by Govt. of India along with the loans it takes from nationalized banks / Treasury bills to directly build universities. The remaining 70% will be given as grants to Universities in exchange for Preferential shares / debentures that promise a minimum dividend / interest every year. The purpose of such a system is to ensure that the end entity (here it is the University) is legally bound to keep paying some money to the investor and hence has to be technically profit oriented and self sustainable. The SPV that invests or sets up the Universities will also be the collector of interests / dividends and makes the decisions for reinvesting those on a continuous basis as per its charter. The shares of this SPV are held in a pro-rate basis by the Companies who got the shares in exchange for the 10% Mandatory Equity Investment / Equity Convertible mandatory debentures. Now, the Govt should also list the shares of this SPV in all the Capital markets like BSE, NSE etc... so that the companies can trade these as normal securities. The issues of any lock in period or Taxation on Capital gain can be debated later.

The above approach of making Tax payers as an Equity owner in Self-sustainable ventures will have the following advantages:

- The Tax payer doesn't treat tax as an expense anymore. The company does see value in higher taxes as it is an investment

- The govt. can practically mop up extra funds without incurring any wrath from corporate side

- There is higher transparency and lower level of corruption in any program undertaken through such SPVs as these are legally bound to pay certain returns to their share holders and hence need to manage the business in a self sustainable way. And as the TAx payers are Preferential share owners with right to vote on certain issues, they can replace the management of the SPV and in this way the accountability of the management is maintained

- These SPVs are different from Public Sector Enterprises in the sense that the jobs in SPVs are equivalent to private jobs as Private players are the sole investors. These SPVs also have a profit motive and have some legal bindings to pay money to investors. Further, these SPVs donot come under the Govt as the govt is only involved in deciding the objective of the SPV at inception and it doesn't have any control on the operations

The above example of REducing corporate tax from 25% to 20% + 10% equity investment for a single focus can be expanded by the Govt. For instance, it can have 4 primary focus areas and this 10% is split into 4% for program A, 3% for program B, 2% for Program C and 1% for Program D. In this case, there will be 4 SPVs. Further, the govt can keep the # of programs fixed and change the programs every year to get funds for new programs.

False Electoral promises

Everyone of us must have come across politicians making false electoral promises. And recently, we have also seen political parties making promises that can create a fiscal crisis if implemented. In an ideal democracy, this problem shouldn't arise as the electorate votes for the ideal candidate based on the information they have. Does this kind of democracy exist in India where majority of the population is literate only for the definition's sake? And most importantly, what is the role of the electorate in a real democracy?

India is a burning example of how corruption can be rampant if the democracy is not defined properly. Just because democracy allows anyone who has been voted to be the best option to represent people, it opens up innumerable options for any person who has the wherewithal to sway the electorate with money or power. This has clearly proved that illiterate / irresponsible electorate will result in the election of a corrupt / irresponsible person who has no intentions of fulfilling his promises or a person with the iron will to implement his promises without any concern for the larger good. And we are all silent witnesses to such "Elections".

To address this issue, a lot of NGOs are trying their level best to get the "None of the above" option in an election so that voters can say that they like none of the contestants. Election Commission has been trying to get hold of people who are resorting to electoral malpractices. In my view, even the "none" option doesn't work as long as the electorate has a short-term horizon and can be easily attracted by money / liquor / false promises. Does this mean that the country has to be a silent witness to false electoral promises? The answer is a resounding "NO".

The essence of democracy is to let the people choose the right candidate. But, it doesn't mean providing unrestricted options to public. The solution is an autonomous body on the lines of Election commission comprising bureaucrats who are selected based on an objective selection process and not by nominations. The evaluation committee for such an interview should be elected by the applicants only from people who have applied for that position. This body should have the responsibilities of Evaluating manifestos, disqualifying potentially disastrous promises and filing & fighting legal cases against elected representatives who haven't fulfilled their electoral promises.

- The Autonomous body should create a 5 year plan for the govt budget and finances based on the current state of affairs and economic scenario before the election nominations are invited. This plan should be submitted to the President of India, Governor of concerned state, Chief justice of India and Chief Justice of concerned state. The objective is to arrive at an unbiased view of the sate of finances for the next 5 years. These things shouldn't be opened before the nominations are filed. After the nominations are filed, these should be made public.

- Ask the Election contestants who are independents to submit their manifestos with a detailed plan of execution, expected budget, funding plan and risk analysis. The Plan should be evaluated for feasibility and potential impact on the Treasury along with a Cost-benefit analysis based on the earlier analysis carried out by the autonomous body. And a grade has to be assigned. In cases of infeasibility or low benefits, the mainfesto should be deemed invalid and the nomination cancelled.

- In case of people contesting on party tickets, the party should submit a pro forma state budget highlighting the key revenues and expenditures for the next 5 years. This should show the impact of thier manifesto. Now a cost benefit analysis should be done by the autonomous body based on their earlier analysis. In case the manifesto results in deterioration of state of finances, the manifesto should be rejected.

- All the parties / candidates with approved manifestos can contest the elections. Those whose manifestos have been rejected can appeal and the appeal tribunal will give out a judgement with in a month. Only after the appeal results are out, can the elections be conducted.

-Apart from the above stated responsiility of disqualifying people making costly promises or infeasible solutions, the body also has a responsibility of filing a case of Fraud against the Elected representatives who haven't fulfilled their promises made in the election campaing. It is also the duty of the body to fight the case legally.


Such an autonomous supervisor will tackle the problem of False / Infeasible promises... As I have said, this is an ideal solution!

As with any solution, creation of such an autonomous supervisor has its own pitfalls. The bureaucrats can misuse the power they have if they are corrupt themselves. This can be controlled to an extent if they are kept under constant surveillance by Central intelligence departments + intelligence departments of states ruled by different political parties. This will address the conflict of interest to an extent. Another way of curbing this is by making sure that no bureaucrat is in the body for more than 3 years and they take up the job as their last assignment. This will also control conflict of interest among the bureaucrats.