Landmark GST Bill Opens India to a Common Market System

Landmark GST Bill Opens India to a Common Market System

Posted by: on Aug 20, 2016 | No Comments

Somewhere along the path of errors comes a cumulative benefit. India has passed the much-awaited Goods and Services Tax (GST). The Indian Parliament voted 197 in favour of this bill with none against in the Rajya Sabaha. This bill is being hailed as a landmark tax reform and the biggest since Independence. Under the new bill, the existing system of Value Added Tax (VAT)

Atlantic City Casinos in Peril: Will Governor Christie Come to the Rescue?

Atlantic City Casinos in Peril: Will Governor Christie Come to the Rescue?

Posted by: on Sep 28, 2015 | No Comments

With four out of the 12 casinos in Atlantic City shutting down in the last eighteen months, Wall Street gas been speculating about what these changes indicate. Some believe that the market is right sizing, since the demand for

Online Gaming: Time to Give it its Due!

Posted by: on Oct 9, 2012 | One Comment

In the first part of this article, which you can read here, we discussed the hurdles that online gaming and its legal status have witnessed worldwide. While the size of the widely popular gambling form is difficult to measure, there are a few ways in which the necessary change can be brought about. In this section, we will talk about those factors that can usher in some positive developments in this regard.

Taxation or Robbery? Where to Draw the Line?

Posted by: on Nov 2, 2011 | 6 Comments

Taxation has been defined as “that part of the revenues of a state which is obtained by the compulsory dues and charges upon its subjects” by The Encyclopedia Britannica. In this definition, the word ‘compulsory’ definitely looms large; and taxation continues to be one of the widely contested topics in India. There are always people who feel that the government levies way too many taxes on them.

 

Taxation in India: Where Does Your Money go?

In India, individuals as well as corporations are subject to direct taxes, which generally are higher than 30%. This means that if your annual income exceeds a certain amount, you are liable to pay a third of your income to the government. There’s more though.

 

The goods and services available in our country are subject to several indirect taxes, thus increasing the net price of the offering. This directly impacts the purchasing power of the people. Some of these indirect taxes are:
Central Sales Tax (CST): This is approximately 4% on the cost of the manufactured goods.
Local Sales Tax (LST): This can be as high as 15%, as determined by the state legislature.
Excise Duty: This is typically between 0 to 16%. However, for some items, such as tobacco, motorcars and air-conditioners, it is as high as 32%.
Customs Duty: The rate varies from 0 to 30%.

 

Taxation: The Need to Draw the Line

One of the biggest disadvantages of taxation is that it takes money from wealth producing business people into the hands of bureaucrats. Taxation thus discourages investments.
While there’s isn’t a definitive answer to how much tax is enough, there is a need for the government to un-complicate the taxation system and not rob the people of their hard-earned money. Remember also that countries with zero or low taxes have thrived. Dubai became rich with zero income tax. Singapore and Hong Kong arose from poverty stricken fishing villages to what they are trading with taxes in income below 20%.

Liquor and Cigarettes – Reduce taxes

Posted by: on Aug 28, 2006 | No Comments

Governments around the world are strapped for cash. Finance ministers, find liquor and tobacco the easiest ‘sins’ to tax. Who can object? Cigarette and liquor companies should be glad they are allowed to exist and be happy that they are merely taxed. Right?

Wrong. The higher the taxes on ‘sins’ the more difficult it is for them to serve any purpose. Ban smoking and drinking and all you do is to drive the liquor and cigarette trade into the hands of criminals.

Whether it be Nepal, India or the US, people do not like to be dictated to and will not give up their habits. We have the right to do what we want with ourselves and will not surrender this freedom.

Prohibition, wherever it might be enacted, leads to gangs and thugs controlling the supply and distribution of liquor, and corrupting the enforcers. Tragic deaths result as people drink illicit spirits manufactured clandestinely without regard to quality. Consumption is not curbed.

In, 1920, the US enforced prohibition. Mafia spread its tentacles across America. Money earned from the illegal liquor sales helped it to establish itself in many other illegal activities as well.

Those were the days made famous by Al Capone and Bugs Moran – the most notorious and ruthlessly efficient suppliers of liquor.

Nobel laureate economist Milton Friedman talks about that era in Free to Choose: Who were their customers? Who bought the liquor they purveyed illegally? Respectable citizens who would never themselves have approved of, or engaged in, the activities that Al Capone and his fellow gangsters made infamous. They simply wanted a drink. In order to have a drink, they had to break the law. Prohibition didn’t stop drinking. It did convert a lot of otherwise law-abiding citizens into lawbreakers. It did confer an aura of glamour and excitement to drinking that attracted many young persons. It did suppress many of the disciplinary forces of the market that ordinarily protect the consumer from shoddy, adulterated, and dangerous products. It did corrupt the minions of the law and create a decadent moral climate. It did not stop the consumption of alcohol.

States in India continue to experiment with prohibition – on again, off again. Be it Gujarat, Maharashtra, Tamil Nadu or Haryana, experiments with prohibition go on. Will they ever learn?

Whether it is outright bans, restrictions or confiscatory taxation, the burden falls disproportionately on the poor. The rich will obtain their supplies of Scotch from regular contacts with links to embassies, smugglers and foreign returnees.

The poor have to depend on illicit hooch as they cannot afford the highly priced imported stuff nor the heavily taxed, local factory distilled brands. We have seen media reports of tragedies with hundreds of people taken ill, blinded or dying after consuming bootlegged liquor.

Cigarettes, though not banned, are heavily taxed. Tobacco companies serve as revenue collectors of the government as the duties are many multiples of the basic price. The better the brand the higher is the tax rate. The burden again falls on the poor. They are forced to smoke beedies or cheap cigarettes without filters which are even more injurious to health.

In the US misguided activism and high tax burden on tobacco companies have resulted in an increasing number of people, especially the young, moving to smoking Indian made beedis. What is good for India’s exports is disastrous for America’s youth. Beedis have more chemicals and carry far more health risks for smokers than cigarettes.

In Nepal few people can afford quality cigarettes and therefore for most smokers the option is to go for cheaper, killer varieties or buy smuggled products on which no duty has been paid.

The results everywhere, without exception, are the same. Ban a popular activity such as drinking or smoking and you drive it underground. You do not stop it. Raise taxes unreasonably and the effects are much the same. Smuggling and tax evasion become the norm.

The answer is to tax cigarette and liquor much the same way as you would tax potato chips and chocolates which too are harmful. Uniform low taxes just work better irrespective of what you are taxing.

The Himalyan Times

Don, you are wrong about taxes

Posted by: on Dec 30, 2004 | No Comments

In response to my December 27, 2004 article advocating reduction in taxes, Don Michaels sent a letter, published in THT, making a case for an increase. Let us analyze each of his arguments.

Don’s first contention is that even if taxes are reduced businessmen will not reduce prices. Don is right that when taxes go down, the prices may not immediately go down, but, in general goods are available at a cheaper rate to consumers in a lower taxed nation than in a high one. Isn’t zero or very low taxes the reason that countries like Singapore and Hong Kong boast of the world’s highest per capita trading volumes as well as living standards which are the envy of those of us in the 3rd world?

Further, high prices due to high taxation reduce demand and thus lower economic activity in the country. If Don, you can afford to buy a Toyota RAV 4 for Rs.20 lakhs, you may not, perhaps, be willing to buy it when taxes result in it being priced at Rs.40 lakhs.

Does Don really believe that if duty rates are brought to zero from say 100% prices will stay the same? How can they? Competition amongst sellers ensures that the consumers get their reductions fast.

Second point made by Don is that, “governments use taxes to build infrastructures; without them nations cannot progress”. I do agree with the later part of the sentence. Nepal does need infrastructure, desperately so. However, if anyone thinks that government taxes result automatically in building infrastructure, that person is dreaming.

A committed socialist like Rajiv Gandhi stated that not more than 15% of what government collects is spent on what the collection is for. 85% or more just disappears in funding the government machinery and in corruption. Why not let the private sector do the job? Why not allow foreign and domestic investment to be utilized for building of roads, airports, communication networks, and power plants?

In India when government regarded telephones as infrastructure people had to wait for years to obtain a connection. And if you did manage to get one it was just that one model made by a government factory and had to be black. When a member of India’s Parliament complained about his instrument not working to the Minister, he was told that only the ‘lucky’ few got telephones as India was poor and there were no funds for ‘luxuries’. Now India’s private companies are not only supplying phone connections by the millions each month, but, are also contributing thousands of crores in taxes to the government.

Don your argument regarding infrastructure doesn’t hold water. Tax money is people’s money, if it is not collected by government it would be available for whatever people desire including infrastructure. To allocate resources is the work of capital markets not government bureaucrats and politicians.

Thirdly, Don says, “As for ‘taking’ money from the rich, who is it that creates the wealth of a nation? Is it a CEO in his plush office or the worker on a construction site, factory, mine or farm?” The implication here clearly is that the worker builds wealth, the businessmen contributes nothing.

This contention displays such ignorance of the wealth generating process that all other arguments of Don pale in comparison. How can anyone even think that a worker without capital, or managerial resources, can produce wealth? Far from it.

If workers could produce wealth on their own then Nepal would be as rich as the US. Does Thapa, a porter, in a remote mountain village at Lukla work harder, or, Smith, an elevator operator, in New York’s Waldorf Astoria Hotel? Thapa in Lukla barely survives, Smith in New York with 1% of the effort owns a car, an apartment, and flies for a holiday to Mexico each year. If Thapa in the Himalayas expended the same effort as does Smith, Thapa would surely starve.

Don, productivity and wealth are the result of capital and capital is destroyed by taxes. Businessmen are required, for they bring in this much needed capital; without them, there would be no site on which to construct, no factory, no mine, and no farm except for subsistence hand to mouth agriculture.

The Himalyan Times

Bush, Kerry, and Taxes

Posted by: on Dec 24, 2004 | No Comments

Ajay Bajracharya, marketing team leader of an NGO, ‘Smallholder Irrigation Market Initiative’ in Jawalakhel, is disappointed. He, like so many others in Nepal, was hoping that Kerry would become the President of the US. Ajay was opposed to Bush’s reduction of taxes for the wealthiest 2% of the taxpayers in the US.

Ajay felt that Bush favoured the rich. It didn’t matter to him that Kerry is married to a billionaire heiress to the ‘Heinz ketchup’ fortune. Kerry’s promise to increase taxes for those earning over US$2,00,000 a year was enough for Ajay. For him taking money from the rich shows that you are for the poor and the downtrodden. If it could only be that simple!

Many people feel the same and populist governments round the world, with a few notable exceptions, make policies to ‘squeeze’ the rich. India, during Indira Gandhi’s regime, had the dubious distinction of having the highest tax rates in the world. The income tax on the wealthiest was over 90%. This burden when combined with wealth, gift, and death taxes exceeded 100% of the taxpayers income in several instances.

If, as Ajay believes, this is automatically good for the poor, then Mrs. Gandhi would have succeeded in wiping off poverty from the face of India. Exactly the reverse happened. Tax collections did not increase, foreign exchange reserves remained chronically short, and India’s economy stopped growing. Unemployment and poverty became synonymous with India.

What happened? The rich refused to be sitting ducks. They rebelled against their enforced martyrdom at the hands of Mrs. Gandhi’s egalitarian philosophy. They evaded taxes, sent their capital to Swiss banks, or simply stopped working.

Now, lets turn to those countries which either had low taxes to start with or reduced them. They become fabulously rich. 11 of the world’s 16 wealthiest jurisdictions are tax havens. The top five are Bermuda, Luxembourg, Switzerland, Liechtenstein, and the US.

What about the ‘evil’ corporations, should they be made to part with at least 50% of their profits? The case of Ireland is instructive. 20 years ago Ireland was Europe’s shame. Its economy was in shambles; double digit unemployment had become the norm. It was Ireland’s onerous tax policy which was, to a significant extent, responsible for this sorry state of affairs. The corporate tax rate was 50%.

This burden on companies was reduced in the 80’s but in 1991 it was still considerable at 43%. At this point, the Irish leaders showed vision and guts. TAXES, all around were cut.

Over the next 10 years, taxes on companies were slashed drastically. Today the income tax on companies is 12.5%, one of Europe’s lowest. If we buy into Ajay’s argument then these cuts should have made the rich richer and the poor poorer.

Nothing of that sort transpired. The Irish economy went from being ‘the sick man of Europe’ to become a ‘European tiger’. Unemployment dropped by 50%, and investment both foreign and domestic zoomed. The economy in the 90’s showed the highest rate of growth – 7.7% each year – amongst all the developed countries.

The people of Ireland (hope Ajay is reading this) were the biggest winners. The Irish, who were Europe’s poor, now enjoy the second highest standard of living in that continent.

Did the government lose revenue due to these cuts? No. At a 50% rate, corporate taxes raised revenue equal to 1% of GDP. With the rates at 12.5%, the government gets 4% of GDP from the corporate income tax. The ‘evil’ corporations are now bearing a fourfold higher burden as a result of taxes being reduced to a fourth of what they were.

There might be valid reasons for Ajay to support Kerry but increase in taxes should not be one of them. Run away from politicians who promise increased taxes for that’s the way to poverty. Support those who will limit the burden of government not enhance it.

It is for sake of Nepal’s poor that we should cut taxes. The rich will always manage, it is for the disadvantaged that lowering of taxes may mean the difference between living and dying.

The Himalyan Times

Don, you are wrong about taxes

Posted by: on Mar 6, 2004 | No Comments

In response to my December 27, 2004 article advocating reduction in taxes, Don Michaels sent a letter, published in THT, making a case for an increase. Let us analyze each of his arguments.

Don’s first contention is that even if taxes are reduced businessmen will not reduce prices. Don is right that when taxes go down, the prices may not immediately go down, but, in general goods are available at a cheaper rate to consumers in a lower taxed nation than in a high one. Isn’t zero or very low taxes the reason that countries like Singapore and Hong Kong boast of the world’s highest per capita trading volumes as well as living standards which are the envy of those of us in the 3rd world?

Further, high prices due to high taxation reduce demand and thus lower economic activity in the country. If Don, you can afford to buy a Toyota RAV 4 for Rs.20 lakhs, you may not, perhaps, be willing to buy it when taxes result in it being priced at Rs.40 lakhs.

Does Don really believe that if duty rates are brought to zero from say 100% prices will stay the same? How can they? Competition amongst sellers ensures that the consumers get their reductions fast.

Second point made by Don is that, “governments use taxes to build infrastructures; without them nations cannot progress”. I do agree with the later part of the sentence. Nepal does need infrastructure, desperately so. However, if anyone thinks that government taxes result automatically in building infrastructure, that person is dreaming.

A committed socialist like Rajiv Gandhi stated that not more than 15% of what government collects is spent on what the collection is for. 85% or more just disappears in funding the government machinery and in corruption. Why not let the private sector do the job? Why not allow foreign and domestic investment to be utilized for building of roads, airports, communication networks, and power plants?

In India when government regarded telephones as infrastructure people had to wait for years to obtain a connection. And if you did manage to get one it was just that one model made by a government factory and had to be black. When a member of India’s Parliament complained about his instrument not working to the Minister, he was told that only the ‘lucky’ few got telephones as India was poor and there were no funds for ‘luxuries’. Now India’s private companies are not only supplying phone connections by the millions each month, but, are also contributing thousands of crores in taxes to the government.

Don your argument regarding infrastructure doesn’t hold water. Tax money is people’s money, if it is not collected by government it would be available for whatever people desire including infrastructure. To allocate resources is the work of capital markets not government bureaucrats and politicians.

Thirdly, Don says, “As for ‘taking’ money from the rich, who is it that creates the wealth of a nation? Is it a CEO in his plush office or the worker on a construction site, factory, mine or farm?” The implication here clearly is that the worker builds wealth, the businessmen contributes nothing.

This contention displays such ignorance of the wealth generating process that all other arguments of Don pale in comparison. How can anyone even think that a worker without capital, or managerial resources, can produce wealth? Far from it.

If workers could produce wealth on their own then Nepal would be as rich as the US. Does Thapa, a porter, in a remote mountain village at Lukla work harder, or, Smith, an elevator operator, in New York’s Waldorf Astoria Hotel? Thapa in Lukla barely survives, Smith in New York with 1% of the effort owns a car, an apartment, and flies for a holiday to Mexico each year. If Thapa in the Himalayas expended the same effort as does Smith, Thapa would surely starve.

Don, productivity and wealth are the result of capital and capital is destroyed by taxes. Businessmen are required, for they bring in this much needed capital; without them, there would be no site on which to construct, no factory, no mine, and no farm except for subsistence hand to mouth agriculture.

The Himalyan Times