Taxing times for the poor and middle class in India
The story of the ruling party's failure on economy in India began with the abrupt decision to decommission currency notes, dealing an irreversible blow to an age-old cash-based system.
Andy Mukherjee of Bloomberg, in his well-received column Toyota or pakora: India must choose, argued the high level of taxation is scuttling the growth of India's automobile industry. While his main argument is debatable, he is certainly not right in drawing a superfluous equivalence between Toyota and pakora (fritters). I seek to argue that Modinomics has caused more harm to humble pakorawalla, chaiwalla and idliwallah (streetfood sellers) than to Toyotas, Suzukis, and Hondas of the world.
The story of the ruling party's failure on economy in India began with the abrupt decision to decommission currency notes, dealing an irreversible blow to an age-old cash-based system. The landmark decision, which came to be known as demonetisation, had haemorrhaged informal and unorganised sectors.
The scrapping of notes was followed by an excessive and overzealous oversight of cash transactions. Some hard limits were placed on the amount of net cash exchanged in a purchase or sale transaction. The legal caps, apart from shortage of cash, complicated the process and drastically slowed down the economic activities at the lower end of the chain. So there were fewer number of cars, flats and plots of land sold and purchased on any given day. This had spelt a death knell to automobile and realty sectors leading to a drastic fall in GDP.
Small time vendors such as chaiwalla and pakorawalla that Andy Mukherjee condescendingly referred to are the drivers of the Indian economy. This point is often missed by big time theorists. It is this section which has deferred their spending plans, resulting in low GDP numbers in the post-demonetisation years. This happened solely because of cash scarcity and the overzealous taxmen who started snooping on all kinds of 'suspicious' transactions.
The Modi regime, for some mysterious reasons, is obsessively concerned with documenting the economic transactions at the lower end of the chain. Their objective seems to be that everyone should pay their fair share of taxes, which in itself is an honourable objective. But the ruling party, often dubbed as the party of petty traders, do not realise the costs of this approach.
It's a paradox that Indians prefer to pay exorbitant taxes on goods, especially big-ticket ones, but show resistance to paying personal income tax. A small vendor such as pakorawalla earns more than Rs200,000 (Dh10,000) a month if he is a popular guy in the area. His entire family including his old parents might help him with chores of the business. But legally he is the person who is earning the money and has to pay at least Rs60k (Dh3,000) in taxes every month. But the vendor, who earned the money with the sweat of his brow, will not part with such a big amount as tax.
It's small time people like these who the Modi regime scared by unleashing the power of the income tax inspectors. At one point, the tax sleuths threatened to monitor social media accounts to gauge people's expenditures. So if you pose a selfie with your luxury acquisition, the tax man could come knocking on your doors. No wonder the opposition called it tax terrorism, a term used by no less a person than former prime minister Manmohan Singh.
There is a whole of section of traders, wheeler-dealers, and realty brokers who make money completely outside the radar of income tax and banking system. These people do buy luxury cars, homes, fancy gadgets, home equipment, and other goods. But because of a tightened tax regime and cash crisis, they had either put off or postponed their spending decisions, resulting in a sudden and surprise slowdown in the period that followed the demonetisation.
The coronavirus pandemic came like a bolt from blue and worsened the woes of Indian economy. The beleaguered government is using the virus as an excuse to explain away the impact of its bad policies over the last several years. Finance Minister Nirmala Sitharaman tried to pass the buck by calling it as an act of God.
Overtaxation of goods such as cars per se is not a problem. Indians romance cars, and buy luxury ones to flaunt their upward mobility. But if a taxman is lurking at the car showroom's office, an average Indian will not show up to buy.
Cars are not flying off the shelves not because of the overpricing caused by excessive taxation but because of the overzealous taxman and restrictions on cash transactions, the singular achievement of the regime in New Delhi.
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