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Wednesday, September 28, 2011

How the System of Taxation works to the benefit of common man !!

Taxes and personal taxes (Income tax) are a matter of concern for common man.  The salaried class generally look to the salary date (which in many cases is the last working day of the month) and 31st July is a much remembered date as it is the due date for filing of return by individual earners within the tax net.  As usual people keep things till the last moment (some might be pushed to do so by the act of others) and there would be great chaos and queues at the IT counters.  Quite often you can hear the complaint that only the salaried class is subjected to so much of taxation while many evade the tax net by not properly declaring their incomes.  The immediate example that comes to mind is that of cine industry where you would often read as ..xx. crores as budget of the film but the producer, actors & actresses who are part of that crores + budget do not end up paying tax (or atleast not to the extent that we hear them to be earning)

Tax is a necessary evil.  There are many areas which are handled by the Government and for rendering those services and providing infrastructure, the State certainly needs revenue.  Where from the revenue come, if not from the subjects ?  (the only Q is whether such taxation is equitable ?? and whether it is properly distributed ???)

"It was only for the good of his subjects that he collected taxes from them, just as the Sun draws moisture from the Earth to give it back a thousand fold" –   Kalidas in Raghuvansh

The system of taxation is not the handiwork of any of the present day Finance Ministers or their wizardly Economists.  The system of taxation has been in vogue for ages and it is stated that there are references to the taxation in Manu Smriti and Arthasastra in varying measures.  The Indian Income Tax Web quotes Manu, the ancient sage as saying the King should levy taxes but should be cautious not to overdo that as it would burden the subjects.  The  king should arrange the collection of taxes in such a manner that the subjects did not feel the pinch of paying taxes. He laid down that traders and artisans should pay 1/5th of their profits in silver and gold, while the agriculturists were to pay 1/6th, 1/8th and 1/10th of their produce depending upon their circumstances.  Not only this, taxes were also levied on various classes of people like actors, dancers, singers and even dancing girls. Taxes were paid in the shape of gold-coins, cattle, grains, raw-materials and also by rendering personal service.

Kautilya’s Arthasastra deals with the system of taxation in a real elaborate and planned manner at a time when the Mauryan Empire was as its glorious reign.  A major portion of Arthasastra is devoted by Kautilya to financial matters including financial administration. The State not only collected a part of the agricultural produce which was normally one sixth but also levied water rates, octroi duties, tolls and customs duties. Taxes were also collected on forest produce as well as from mining of metals etc. Salt tax was an important source of revenue and it was collected at the place of its extraction. 

There are direct and indirect taxes.  The one paid directly to Govt by the persons on whom it is imposed is Direct tax which would include tax on income.  Indirect taxes are Sales tax, value added tax, service tax etc.,   

In simpler terms, tax is nothing but sharing of expenses of the Government by those who are the subjects of the Government.  It is the subjects who have to bear all the taxes – there can be various ways of distributing the tax burden.  In many civilized societies,  methodology is arrived at to ensure that it does not burden the poorest of the poor and the richer persons share a higher % - but in many instances, this is not put to practice properly and here is a parable explaining the present way of taxation…….

Imagine a small Society and ten men of that group dine and enjoy every day in a particular place.  A simple dinner is what they have every day at a small eatery and their bill for all the 10 of them comes to Rs.100/-

Now, Rs.100/- is the expenditure, which obviously have to be shared by those 10 persons.  The simplest would be each sharing equally and thus each person paying Rs.10/-  -  Equally, what a preposterous  suggestion ! Injustice to poor !!  -  will this not help the rich men spending less and the poor having a higher burden (even though all of them eat and some may eat more than then others – i.e., enjoy more or at least equal of what others get to enjoy)

The wisest amongst them arrives at a solution akin to the way we pay our taxes……….   The first four men (the poorest) would pay nothing .... The fifth would pay Rs.1; The sixth would pay Rs.3 ; Seventh would pay Rs.7; Eighth would pay Rs.12.; Ninth would pay Rs.18.
The tenth man (the richest) would pay Rs.59.  So a system was evolved on sharing the expenditure equitably !!

The ten of them went to the same eatery and dined everyday and things were smooth.  Everyone was happy with the arrangement.  The problem came with a good natured move by the eatery owner.  As all of them had been patronizing him regularly, he offered a discount of 20% and thus the costs came down to Rs.80/- from the erstwhile Rs.100/- 

The group still wanted to pay their bill the way we pay our taxes, so the first four men were unaffected. They would still eat for free. But what about the other six men -- the paying customers?  How could they divide the Rs.20 windfall so that everyone would get his "fair share"? They realized that Rs.20 divided by six is Rs.3.33. But if they subtracted that from every body's share, then the fifth man and the sixth man (who had been paying Re 1 & Rs.3 hitherto)  would each end up being paid to eat.  So the Eatery  owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay!
And so:
The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid Rs.2 instead of Rs.3 (33% savings).
The seventh now paid Rs.5 instead of Rs.7 (28%savings).
The eighth now paid Rs.9 instead of Rs.12 (25% savings).
The ninth now paid Rs.14 instead of Rs.18 (22% savings).
The tenth now paid Rs.50 instead of Rs.59 (15% savings).

Though the tenth was paying Rs.50/- he was better off than before – as also were the others – the first five were not paying at all – whilst sixth to 10th had got a discount. 

After a couple of days, one of the non payers prepared a statement which showed the reduction as : 0,0,0,0,0,1,2,3,4,9.  sooner they discussed with frustration that the 10th man was enjoying the maximum benefit of that discount – a lion’s share of the discount of Rs.20/-, and how improper it is to do so !!  Is that not a situation of rich exploiting poor ……..  the first few were more aggrieved as they could visualize the discount that was being offered  but they were unjustly denied their share of the bounty … how cruel and how manipulative rich are !!! they exclaimed.

So, the next day, the nine men surrounded the tenth and beat him up.  Battered and bruised and driven to despair, the tenth man could not show up for dining the next night.  The others revelled but when it came to paying the bill it was Rs.72/- and if the rest were to pool in the same way, it would only total to Rs.30/-  -  again they cursed the system and the rich men for placing them in such an embarrassing situation !!

---------  that Dear (s) is perhaps is how the equitable system of taxation works.  The people who are industrious, have money and put much of their efforts, earn more and pay more of the taxes.  Whilst those sit back and relax could enjoy the benefits of taxation. 

Any reduction in taxation should ideally benefit those who pay more but we keep restricting the tax net, leaving those in the bottom out all the time and continue to fleece more of those who have been paying. 

At some point of time, they might get frustrated and decide not to show up any more – go for a different place or even simply not earn at all……… the atmosphere will only worsen and certainly not be friendlier.    

For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible

With regards – S. Sampathkumar

[one of my good friends forwarded this to me and on search found that this has been circulating on the web for some years now and had been attributed to some Economists who have all declined that it was their explanation.  However, this makes an interesting and logical reading…  posting this with some local flavour though I cannot claim to be the author in any manner]

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