What Chanakya Can Teach Modi Government On Taxation And Foreign Trade

Some things don’t change, even after 1,400 years. Utterly perplexed by the complexities of the goods and services tax (GST) which was inaugurated on 1 July, and in the spirit of the times, I decided to look up what Chanakya might have said about the principles of taxation.

Eventually, apart from Chanakya’s own treatise, I found a paper in the ‘Indian Economic Review’, written back in 1996 by Charles Waldauer, Willim Zahka and Surendra Pal of the Widener University. The title of the paper is revealing – ‘Kautilya’s Arthashastra: A Neglected Precursor to Classical Economics’.

This is not surprising. Chanakya’s work was lost around the end of the Gupta dynasty in the late sixth century CE and rediscovered only in the early twentieth century. In between, a host of economists in Europe reinvented the wheel of economics.

India, which was, and remains, a captive of the Western intellectual tradition, adopted these ideas as gospel. The good thing is that at least in some respects Chanakya had said much the same things earlier.

GST and Chanakya

Chanakya was obsessed, quite rightly, with the health of the royal exchequer. He said successful kingdoms must have healthy finances and that it was quite alright to use coercion, i.e., the army, in collecting taxes. He therefore wrote that:

“All undertakings depend on finance. Hence foremost attention must be paid to the treasury… Thus, when both the receipts and expenditures are properly earned for, the King will never find himself in financial or military difficulties... sometimes, the army is the means of securing the wealth acquired; but wealth is always the means of securing both the treasury and the army.”

Coercion by the state to acquire and augment its revenues is fine, he seemed to be saying. This is sound advice which all governments everywhere follow.

However, successive Indian governments seem to have ignored the other advice Chanakya gave regarding taxation – that it should be easy to calculate, convenient to pay, inexpensive to administer and equitable in its burden.

The GST’s intent is to make doing business easy regardless of location, increasing revenue for the government by encouraging compliance, and maintain the burden on the taxpayer at the levels prevalent before GST. But it is anything but.

As currently implemented, is not convenient to pay, as can be testified by the lakhs of businesspersons spending sleepless nights trying to grapple with the GST Network online portal. And GST is certainly not easy to calculate, since the multiplicity of rates has rendered even the simplest product susceptible to several rates of tax.

This is because of the political concern with equity. There are a number of goods and services used by the poor that face zero or minimal taxation. In order to ensure that there is no reduction in revenues, this has forced a higher rate of tax on those ‘luxury’ goods used by the rich. Hence the 28 per cent rate, which is far too high.

In the quest for equity, the government has compromised on all the other tenets laid out by Chanakya, including that low taxes be paid by all rather than high taxes be paid by just a few. So much for relying on Hindu wisdom of the ages.

Chanakya and foreign trade

A great deal has been made by the West about the idea of comparative advantage in international trade. The theory was put forth by two Swedish economists, Eli Heckscher and Bertil Ohlin, that a country will export goods that use its abundant factors intensively and import goods that use its scarce factors intensively. A huge body of research has been developed around this idea in the West, and it has become the principal instrument for opening up markets.

But Chanakya had said the same thing 1,400 years ago. Consistent with his notion that the king was within his rights to tax all forms of economic activity, he also said that international trade should be taxed. He wanted import and export duties to range between 4 per cent and 20 per cent, ad valorem. Successive Indian governments have ignored this advice and adopted entirely ad hoc taxation policies of foreign trade.

And this is not the only thing they have ignored. Chanakya also insisted that trade should not be a one-way street where the kingdom imports a lot of things and pays for it with gold. Instead, he said, the import of things should be balanced by the export of things. Otherwise, he said, all the bullion would flow out.

India’s trade deficit with China is an example of how we have ignored Chanakya.

The Indian philosopher had also said that foreigners who imported goods should be exempted from being sued by the king and that only private suits against them should be permitted. Pranab Mukherjee blithely ignored this advice when he sent a tax demand to Vodafone for around Rs 35,000 crore and sued it later when it declined to pay.

But our governments have accepted all of his bad advice, of having state monopolies in international trade and price and profit controls.