Sitharaman's infrastructure push need not be a pipe-dream: Here's how

Union Finance Minister Nirmala Sitharaman
Build infrastructure first, private investments including Foreign Direct Investments (FDI) would automatically follow is not an audacious or far-fetched dream. China did it with a great deal of success. Finance Minister Nirmala Sitharaman obviously wants to emulate the Chinese model without actually saying so when a few days ago she outlined her government’s plan to launch a massive Rs 102 trillion infrastructure development plan. Skeptics wonder if it is feasible as it would be a quantum jump over the present average of about Rs 8 trillion infrastructure investments per annum.  

A combination of public private partnership (PPP), Swiss Challenge Model (SCM) and intelligent tax incentives for investments in infrastructure bonds can realize her dream and break the lack-of-investments-lack-of-employment-opportunities logjam or vicious cycle. This article focuses exclusively on infrastructure bonds as a tax reduction tool. It has been tried in the past but not on a large enough scale. The government must be prepared to enter into a compact with the taxpayers so that they can discharge a large sliver of their tax liability by way of investments in infrastructure bonds. The bond for tax compact can be fashioned on the following lines:

Investment in Rs % tax deductible  Interest % per annum  Lock-in period years
Upto 1 lac 100 4.5 5
Next 1 lac 95 4.6 5
Next 2 lac 90 4.7 5
Next 2 lac 85 4.8 5
Next 4 lac 80 4.9 5
Next 10 lac 75 5 6
Next 10 lac 70 5 7
Next 10 lac 65 5 8
Next 10 lac 60 5 8
Next 10 lac 55 5 9
More than 60 lac 50 5 10

The above model tax incentive matrix should apply secularly to all types of taxpayers be they individuals, firms or companies subject to the condition that their Total Income (taxable income) should not go below 50% of the Gross Total Income after deducting other qualifying amounts under Chapter VI-A. 

Let us consider a hypothetical case of a senior citizen. 

Gross Total Income: Rs 10,000,000

Section 80C deduction: Rs 150,000

Section 80TTB deduction on bank interest: Rs 50,000

Total income prior to infrastructure bonds: Rs 9,800,000

If he wants he can bring it down sharply to Rs 4,900,000 by investing in the specified infrastructure bonds as follows:

Investments  % tax deductible Tax deductible Cumulative 
 1 lac 100 1.00 lac  1.00 lac
 1 lac 95 0.95 lac  1.95 lac
 2 lac 90 1.80 lac  2.75 lac
 2 lac 85 1.70 lac  4.45 lac
 4 lac 80 3.20 lac  7.65 lac
10 lac  75 7.50 lac  15.15 lac
10 lac 70 7.00 lac  22.15 lac
10 lac 65 6.50 lac  28.65 lac
10 lac  60 6.00 lac  34.65 lac
10 lac 55 5.55 lac  40.20 lac
17.60 lac 50 8.80 lac  49.00 lac

He has indeed been made to sweat it out. If you tote up the first column, he has been made to invest Rs 77.60 lac so as to be able to knock off Rs 49 lac from his taxable income.  

At a time when savings rate has come down, the above incentive would not only shore it up but also improve tax compliance because people while resenting paying tax, which in their perception goes down the drain, don’t mind the vicarious tax of blocking their money in infrastructure bonds. They don’t even mind investing for the next generation. What is galling for them is the prospect of paying tax, period. Not many people share the noble sentiments of Justice Holmes — I like to pay my taxes; with them I buy civilization.

The government should be happy that they are still buying civilization by investing in infrastructure bonds instead of paying their full taxes. The rider that the tax deductible amount cannot exceed 50% of the total income is to ensure that the tax collections do not fall precipitously. After all, the government needs money to run its numerous establishments and bankroll its numerous subsidy schemes. It is entirely possible that despite this rider, there may be a sharp fall in revenue. To overcome the shortfall, it will have to revive wealth tax which was abolished by the late Finance Minister, Arun Jaitley in 2015 rather churlishly and in a manner of throwing the baby with the bathwater---cost of administering the wealth tax law, according to him, outstripped the meager collections therefrom about Rs 1,500 crore.  What he ought to have done was to make it more wholesome by targeting all the assets instead of whimsically targeting just 6 assets.   

Nirmala Sitharaman should now revive both wealth tax and estate duty which has been in a suspended state since 1985.  Wealth tax of say 3% on all assets in excess of Rs 2 crore after exempting residential properties upto a maximum of Rs 2 crore won’t hurt anyone. When some states in the USA can impose estate duty or inheritance tax in the range of 45% to 50%, there is no reason why India cannot on estates devolving on inheritors in excess of Rs 10 crore at a reasonable rate of 5% to 8%.  

The Finance Minister can convert the infrastructure challenge to an opportunity for bringing about a paradigm change in the direct taxes regime. GST was an indirect tax reform that came not a day too soon as rightly said by the former Chief Economic Adviser Arvind Subramanian. But being an indirect tax and hence regressive, it should not be looked upon to beef up government’s revenues and funds beyond catching the tax evaders. Direct taxes need reforms. 

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