Revive the Tax of the great Empires

At a time when the Planning Commission says 54 million people have risen above the poverty line, state governments seem to have fallen below it. Many can barely pay employees’ salaries, some not even that. In consequence, urgently-needed investment in primary education, infrastructure and rural development is not taking place. The states say they have raised all the taxes feasible, and can raise no more.

This is not so. The Mughal and British empires ran primarily on one tax land revenue. This was a rough-and-ready substitute for agricultural income tax, one relatively easy to administer. Land revenue yielded enough through history to finance the most expensive wars and the greatest empires. Yet it has dwindled to almost nothing in independent India. Despite today’s fiscal crisis, no state wants to raise land revenue even to the level needed to defray the costs of the land administration.

Why? Politicians say the tax is politically unfeasible for two reasons. First, 90 per cent of all rural folk own some land, and politicians say you cannot levy a tax-that affects the vast majority of people. Second, the British Raj looted peasants through land revenue, and so .politicians claim the tax is unacceptable for historical reasons.

Neither explanation is convincing. It is untrue that you cannot levy taxes affecting the majority of people. Excise duties are levied on textiles, matches tobacco, plastics, paper, medicines and sundry other items used by almost all. Besides, you can always exempt marginal and small farmers from land revenue on grounds of equity. Yet in practice, all farmers are exempt, including the biggest.

As for the second reason, the British left India almost 50 years ago, and no peasant today equates land revenue with colonialism. True, paying taxes to sustain a foreign conqueror was inequitable, but why should it be inequitable to pay taxes to sustain your own independent country?

The real explanation is more sordid. It is that the government of independent India arouses almost as much resentment and contempt among rural folk as the British Raj once did. Farmers, like other citizens, regard taxes as money extorted by crooked politicians for nefarious purposes, not as a civilised way to finance public goods. So they avoid paying land revenue, and the moral authority of the government is so low that it dare not use force to make the farmers pay. So, making a virtue out of necessity, the government has virtually abolished land taxation.

We urgently need to revive land revenue, for three reasons. First, state governments badly need money for urgent social spending. Second, land revenue is a good proxy for agricultural income tax, which no farmer pays. Third, as highlighted recently by the Appu Committee, a good land revenue system protects small peasants from encroachment by the rich.

How can we overcome the resistance of villagers to land revenue? By earmarking land revenue for spending by local panchayats. In that case, villagers will see the tax as something which finances local facilities, not something which disappears into the pockets of politicians in the state capital. Unfortunately, land revenue is not one of the subjects to be transferred to the panchayats under the 73rd Constitutional amendment. Still, it is open to state governments to do so on their own. Since they themselves dare not levy land taxes, they might as well devolve the power to panchayats.

Some people argue that panchayats will never levy a tax on land since they are dominated by the big land-owning castes. This is certainly true in fair measure. But there are still two ways to get round this. One is for state governments to set the rate of land revenue but entrust panchayats with collection, and say the money collected will belong to the panchayats. This combination of stick and carrot should improve incentives for revenue collection in many if not all panchayats.

Second, state, governments should institute a system of matching grants. For every rupee of land revenue collected by the panchayat, the state government should give a matching grant of one rupee. In that case, villagers will no longer see land revenue as money extorted by outsiders. They will suddenly see it as a way of extracting money from outsiders for their village. This can overcome their reluctance to tax themselves. In Colombia and Mexico, such matching grants have worked very well in spurring local revenue collection and thus financing local projects.

In backward states like Bihar, land records are obsolete or nonexistent. This makes it easy for the powerful to use force to take over the land of the weak. Even where land records exist, these arc tampered with by bribing’ palwaris. The Appu Committee has proposed computerising land records. If the registration of land transfers is computerised, updating becomes automatic. All village computers should be linked to NICNET, so that any official in the state can access land records, NGOs too should be granted such access. This will help check illegal land takeovers. Tampering with computers is possible but much more difficult than tampering with registers. If village data are simultaneously recorded on hard discs and printouts at the district and stale level, tampering can quickly be detected.

Installing and maintaining computers is expensive. Financing this will become easier if land revenue rates are raised and devolution to panchayats is used to improve actual collection. Even if land revenue is levied at an average rate of just Rs 50 per acre on India’s 400 million acres of arable land, that will fetch a whopping Rs 2,000 crore. Panchayats will find themselves flush with money for rural development.

Mr Narasimha Rao, you need new ideas before the general election. Here is one. The tax which financed a thousand empires can be reshaped to finance growth and social justice in rural India.

What do you think?