Real scam: We pay Rs 4,00,000 cr in 'bribe taxes' a year

By R Vaidyanathan

In this post-Anna, post-Baba Ramdev phase, it seems there is no limit to the brazenness of our netas and babus when it comes to corruption. But then, salt cannot be made more salty.

There is an advertisement, often shown on TV, in which a young boy exhorts his father to be honest and pay taxes, since the money will help the government build infrastructure, etc. Unfortunately, there is no ad showing the daughter of a government official or politician encouraging him to avoid taking bribes.

Everyday corruption is breaking the backs of the aam aadmi, including the much-reviled middle class. The index of middle-class misery can be measured by adding up the official tax rate, the inflation rate and the corruption rate.

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In this article, we attempt to estimate the real cost of bribes and corruption using various calculation methods and assumptions. And here’s the big number: the informal “taxes” we pay in the form of bribes probably add up to Rs 4,00,000 crore annually - nearly 6 percent of GDP. Add the big corruption scandals, and the figure could add up to 12 percent of GDP (explained below).

[caption id=“attachment_434781” align=“alignleft” width=“380”]  Say no corruption. Reuters[/caption]

However, this bribe-related taxation is not discussed in open forums by businesspersons since they are worried about the next round of bribe-giving that may fall due. On the contrary, they even take out full-page advertisements to defend the stealing of public money - whether it is the allocation of coal blocks or airport land.

It is smaller businessmen who bear the brunt of this corrupt state. The smaller the business, the larger the share of bribe one has to pay the minions of the powers-that-be. For instance, a retail vegetable vendor earning Rs 400-500 a day may end up paying Rs 40-50 as bribe to the police and other agencies. This comes to nearly 10 percent of his gross income, and a phenomenal proportion of net revenue.

Government employees collect taxes on two accounts - the client account, which is intended for the government’s coffers, and the “personal account”, for their own pockets. Often, the “personal account” collections significantly exceed what is collected on the government account.

Innovative mechanisms are thought of by government officials to do this, as in the case of a registrar’s office in Tamil Nadu where regular “bribe collectors” are employed by officials. This way, even if they are caught, the actual bribe collectors can always deny any wrongdoing.

Collections on the “client account” can be done only by employees in tax-related (like direct and indirect taxes) departments. But “personal account” collections can happen in almost any human endeavour involving the state - and it can be collected through inaction, speed, inducement, lure, threat or intimidation by any government employee or his agent. It is to be noted that without political patronage “personal account” taxes - bribes, in simple terms - cannot exist.

We can call this “bribe taxes” to distinguish them from taxes imposed by budgets. It is also a total solution situation - imposed on us from womb to tomb. To get a birth certificate, parents need to pay a bribe upwards of Rs 1,000 in some states (depending on the number of originals needed). For collecting a death certificate, the payment can run into thousands of rupees if the government official senses that it is important for transferring a huge amount of assets.

Recently, there was a report suggesting that in government hospitals in Bangalore, a newborn child is shown to the mother only on payment to hospital employees engaged to provide this “service” to patients. The “fee” is Rs 300 for a boy baby and Rs 200 for a girl, which reveals an obnoxious gender bias, even in corruption.

Government employees collect bribe taxes from citizens on many counts, some of which are presented in the accompanying table. It is clear that the bribe tax collection is a birth-to-death levy and, more important, is no longer considered improper.

An informal survey was done over the last three years in different parts of an Indian city to obtain an idea of the type of bribe taxes collected in practice and to estimate the amounts changing hands.

This, coupled with various media reports about graft cases/Lokayukta reports published in newspapers, has been used by this writer to arrive at bribe tax details. This does not cover large amounts of bribe taxes pertaining to major/minor projects awarded at the state and central levels. It is estimated that for all categories, the revenue generated in one city on account of bribe taxes could be around Rs 5-8 crore a day. And this is only for those nodal points not directly involved in collecting government taxes.

Based on an average of 250 days of activity in government offices, the annual bribe tax would be at least Rs 2,000 crore in each major city. At the national level of, say, 50 cities/towns (minimal estimate) it adds up to a whopping Rs 1,00,000 crore for 2010-11.

According to the Economic Survey 2011-12, the combined tax receipts of the central and state governments in 2010-11 were Rs 12,37,344 crore. If we use the thumb rule that in general taxes are under-collected upto 20 percent of what is due (again, probably an underestimate), then the actual taxes would have been Rs 15,46,680 crore. The difference of Rs 3,09,336 crore arises out of bribe tax reasons.

Putting the earlier estimate of Rs 1,00,000 crore generated in all government activities plus this estimate of Rs 3,09,336 crore of bribe tax in tax departments, we get an estimate of Rs 4,09,336 as bribe taxes. Our GDP at market prices during 2010-11 was Rs 76,74,148 crore and corruption money thus amounts to nearly 6 percent of GDP.

This is without taking into account the huge corporate transactions on contracts worth billions of rupees on airports, expressways, coal blocks, spectrum allotments, power plants, IT parks, defence purchases, etc. If we add them all, the bribe tax collections would be at least 12 percent of GDP, when the aggregate tax-to-GDP ratio is around 16 percent.

This implies that on a bribe tax plus regular tax basis, our tax-GDP ratio is nearly 30 percent, which is highly comparable to many developed economies. We may conclude that our “effective tax rate” is around 30 percent of our national income, which is twice what is shown as the “nominal tax rate”. Hence, the chorus by Leftist economists that India is an under-taxed nation is an untenable theory, based only on regular taxes.

In this case, several hundreds of miles separate reality and Leftist experts. The bribe tax is one of the important reasons why a large number of posts in various government departments are apparently auctioned to the highest bidder by our political masters.

Needless to add, bribe tax collections are done with the connivance and/or encouragement of the top political leaders, who get a large share. The important issue is the use of the humongous amount of bribe tax by receivers. A substantial portion of the unorganised credit market is serviced by bribe tax amounts and the police is said to be emerging as a major credit provider/collector in the unorganised trade and retail markets. This has far-reaching implications for civil society and the credit markets.

The Gangotri of corruption is the illegal money stashed abroad and recycled as foreign direct investment (FDI) or portfolio flows into the country. The brazenness exhibited during the 2G scam and the recent Coalgate scam does not augur well for our republic, since it sends a signal that bribery, thievery and thuggery are all acceptable forms of governance as long as you can use organs of coercion like the CBI and the Enforcement Directorate to arm-twist your opponents.

The author is Professor of Finance, Indian Institute of Management, Bangalore, and can be contacted at vaidya@iimb.ernet.in. The views are personal and do not reflect that of his institution