Monday, March 19, 2012

Indian Budget: Killing the Goose that lays Golden Eggs!

There is a likelihood that some of you might have heard of the folklore about the foolish man who killed his magic goose which provided him a golden egg every day. His greed for amassing wealth as quickly as possible compelled him to take the decision of killing his goose to take out all the golden eggs from its belly all at once !

While watching the news channels that beamed this years budget proposals made by the Hon'ble Finance Minister of India Union, some how the above said story came to my mind.

I am not an economist or expert in the economic nitty-gritties of a massively populated and complex country like India.

The minister and his team of experts know better than me about running the country's finances.

No doubt about that.

Yet, common men like me are compelled to think otherwise.

Are the so-called financial experts administering the country trying to kill its economy and its people by their tax administration and taxation policies?

I do not say that citizens should not be taxed. But taxation should not be such a way that it forces the very sources to get dried up and initiates negative growth.

It is the common man with some income who is the fundamental element that keeps the country in shape. The common people are the base for the country's existence, its markets , its richness and its governmental system.

The government in any case takes a cut of its own on every rupee that is transacted in each and every money exchange or transactions by various kinds of indirect taxes. Every goods and services have an indirect tax component embedded in them. As long as people buy goods and services, the government makes money as taxes, even when the business men do not make a profit.

Take for example the airline ticket charges. Even if the airline is ready to take you free, the government will not allow them to do it. A few thousand rupees per hour of flying per seat is mandated to be paid to the government as various kinds of taxes.

If this is the ground reality, if the government wants to enlarge its coffers, what should it do?

Should it cut the source of money or encourage the people to have more transactions ?

If you are thinking like the man who killed his goose, you would rather opt for the first choice !

That is taking away the money of the common man by taxing him at the source of his income by the so-called income tax !

Is it prudent to think of cutting the income of a person who is finding it hard to adjust his own personal budget ?

Some amount of money is required for meeting his essential expenditure of his house hold. That means he or she would spend that much money almost compulsorily. There is not much choice for saving any from that. The person is not likely to have any substantial sum of money with him at any time.

He earns some money and he keeps spending it for his needs.

And what he spends is directly going into the market economy of the country with the government benefiting first by way of indirect taxation. Indirect taxes like excise duties, sales tax, service tax and the like totalling 10 percent or more goes to the government in every transactions involving goods and services.

The money gives out by an individual for purchasing goods and services goes into the hands of service providers who in turn uses the money to source their inputs. This way financial transactions keep taking place.

If the same amount changes hand 10 times an year, the government gets an amount equal to the original amount as indirect taxes. If the number of transactions increase, the major beneficiary is the government. The government will have more to spend on priorities of its own, making further boost to the economy by enhancing the opportunities of income to the individual citizens. The cycle of progress proceeds in positive trend in this case.

Thus governments that are run by wise and intelligent people would create a situation wherein the above said positive economic trend is maintained.

Such a government would have main economic priorities with an objective of enhancing individual incomes at the lower levels and creating more opportunities for people to come into the income generation bracket.

In simple terms, this means their priorities would be to create more and more employment and to see that the lower level incomes of citizens are raised progressively so that they can afford more and more goods and services.

Once this is ensured, the government need not worry much about its sources of income for meeting the expenses for providing a better administration.

Hence a wise thinking government would never think of taxing its ordinary citizens by the so-called income tax which essentially cuts down the source of money which supports the country's market for goods and services.

It would perhaps consider to impose direct income tax only when there is a probability of excess  income beyond the capacity of the individual to spend for his needs on goods and services. This excess is likely to be kept idle without any possible transactions in the year or later. An individual who makes an income much more than he needs to maintain his lifestyle would have such an 'idle' excess income which accumulates in his bank account. This excess income accumulation in more and more individuals would cause some individuals to spend loosely creating unjustified price rise in certain kinds of goods, services or assets. There is not much harm if the government tries to cut some of that idle income of an individual by income tax. Essentially, this is the purpose of income tax. It should not be used as the primary means of income generation by the government, if the government is wise !

Now let us see how much money a typical middle class Indian nuclear family needs to sustain their lives in their middle class way of living.

If the head of the family has an income more than this, there is the likelihood of an idle income for this person and he or she could be a probable candidate for 'income taxation'.

By the phrase 'typical middle class Indian nuclear family' I mean a family consisting of a husband and a wife with not more than two dependant children, living in an urban area, with one of the adult member having a regular income from some kind of economic activity.

Now let us examine what could be the most realistic monthly expenditure this Indian family unit would have on a conservative and realistic approach.

For this analysis, I take the first quarter of 2012 as my base and the expenses as given are typically applicable on an average for such a family.

The members of this family are careful with their income and expenses and are responsible citizens with no vices or bad habits to drain out their incomes.

All expenses are on a monthly average basis and the numbers are in Indian Rupees (INR).

The following gives the monthly expense account for this Indian family:

1. Rice (30 kg ) :              1000
2. Wheat flour (20 kg) :    600
3. Pulses (4 kg) :              350
4. Vegetables :                 600
5. Milk (1.5 L):                1400
6. Cooking Oil (4L):        400 
7. Spices/salt etc:            200
8. Misc eatables:            1200
9. News Paper  :              200
10. Domestic fuel :          450
11. Electricity :               600
12. Local transport :      2000
13. House rent (2 BR):  5500
14. Telephone/Mobile:    600
15. DTH/Cable TV :        350
16. Education Expenses: 2000
17. Clothing (prorata) :   2000
18. Health Insurance:      2000
19. EMI for loans:         15000 
20. Vacation travel:        2500
21. Other services:         3000

       Total ---------         41250 ; Say, 40000 per month or just $ 800 per month.

This amounts to nearly INR 500,000 or less than $ 10,000 annually.

In my simple common sense, India government should not consider taxing any of its citizens having an income less than this amount by way of income tax.

Any income above this may be deemed as the surplus or taxable income which could be taxed in a few slabs at the rate in the range 10-70 %.

The above should be applicable only for individuals.

Since corporates are entities who are engines for economic growth, their incomes should be taxed at a lower rate, allowing them to sustain and grow.

These are just suggestions from a common man.

Past history tells that those in authority and position do not listen to the voices of the common man while they enjoy such positions and powers.

Any way whether to kill the golden goose or not is up to its owner !

[When color TV and telephones were common things in most parts of the world, for Indians they were super luxuries before 1980 !  Indian leaders controlling the goverment used to consider electronic goods as a luxury and never allowed these things to be brought to India even from abroad.

Bringing any kind of electronic consumer goods to India was treated as a sin and an offense of the highest order. With this mind set they kept the country away from contemporary progress for over three decades. Things changed when the old leadership got changed.

If this is any lesson, people should think of supporting young leaders for getting effective and radical changes in the government policies in accordance with the common man's thoughts. Progressive financial management thoughts and policies can only come from younger brains ! A UP like wave is needed for the whole of India !]

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