Just yesterday, I stumbled upon a news report so ridiculous that it might have been on Faking News or UnReal Times. Alas, it was not a work of fiction, but rather fact. It said that, since 2 May, the Customs and Excise Department had held up a brand new MiG-29K at a Goa port, because the customs duty had not been paid by the Indian Air Force.
In other words, the Ministry of Defence had not paid a tax to the Ministry of Finance. It started earlier this year when the government decided to subject military equipment to customs duty, in order to “level the playing field” for Indian manufacturers. This has resulted in spare parts and engines for numerous aircraft being stuck at various ports till the dues of Rs 160 crore are paid by the Defence Ministry.
If the spare parts are not available, the planes cannot be serviced in a timely manner, reducing the life of the aircraft and increasing the chances of malfunctions and accidents. This problem is not limited to the Air Force and affects the Army and Navy as well. How are the soldiers supposed to guard our borders in such a situation? Does the Finance Ministry expect them to use paper planes, plastic models of battleships and remote-controlled toy tanks?
And I have not even mentioned the adverse effect this will have on the quality of equipment manufactured by Indian firms because they’ll be insulated from competition. They will have less incentive to innovate and more incentive to make sub-standard gear for our soldiers. Tariffs and customs duties are bad in every sector since they result in higher prices and worse quality, but they will be especially devastating for the military. Our soldiers already use obsolete equipment and vehicles, as evidenced by exploding submarines and crashing aircraft. A tax on imports will only make things worse.
How do we fare in the civilian sphere? Not much better I’m afraid, owing to the infinite wisdom of our policy makers. Take the Central Industrial Security Force(CISF) which provides security to the airports (owned by the Ministry of Civil Aviation for most part), Delhi Metro and to other similar facilities. Even they are subject to tax. The CISF is a central police force under the Home Ministry, which has to pay tax to the Finance Ministry, because it renders services to other government departments.
Another example from March this year, is when the Force One headquarters of Mumbai police commissionerate could not be handed over to the agency because property taxes had not been paid. Force One was set up to protect Mumbai from terror attacks post 26/11, but they can’t do their job because the BMC wants to collect taxes from the government of Maharashtra. Where are the commandos supposed to live? How can they protect the city if they do not even have basic housing facilities? Fortunately the Maharashtra government is considering a new law to exempt the police from property tax, but given how slow and inefficient the process of legislation is, I would not harbour any false hope.
What about the economic implications of all this nonsense? Let us revisit the first example of military equipment. Here are the steps involved:
Step 1: The Ministry of Finance allocates a certain budget to the Ministry of Defence.
Step 2: The Ministry of Defence buys military equipment from abroad.
Step 3: The Ministry of Finance charges a tax on that equipment, which was purchased using funds from the finance ministry itself.
Now think of all the resources wasted. Human resources, ie: bureaucrats waste a lot of time filing a ton of extra paperwork that is not needed. These highly educated bureaucrats could have done a much better job in the private sector and contributed to economic growth which is sorely needed in India.
Think of all our tax money being wasted on paying these bureaucrats to process the paperwork. Enormous amounts of money which could have gone towards buying better equipment for soldiers, or building schools and hospitals, funding some other social programmes or simply giving a tax break to the poor, hardworking citizen.
Think of the time that is unnecessarily wasted. In the absence of these inefficient regulations and procedures, the government would have been able to get things done more quickly and at a lower cost.
Government taxing itself is akin to me transferring money from my left pocket to my right pocket. Sure, I can do that, but it’s a waste of my time and energy that I’d rather use more productively.
What is the solution to this mess?
There are a few basic measures the government can start with. The military (and ideally everyone else) should be exempt from customs and tariffs in the interests of economic efficiency. The airports should be privatised and the owners should have to pay for security, either private or provided by the CISF. Either way, the government should not be taxing its own agencies.
In conclusion, I will just say this. The government has become too large, and one branch of the government often does not know what the others are doing and simply get in each other’s way. The only way out of this mess that I can see is to cut government down to size.
(Jairaj Devadiga is an economist and can be reached at jairajdevadiga@gmail.com. The opinions expressed in this article are the author’s own and do not reflect the views of The Quint)
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