Tax the NRIs

(Via Secular-Right India and India Uncut),  this article by Financial Express revives the idea of taxing the emigrants from the developing countries:

According to the report, ‘India and the Knowledge Economy: Leveraging Strengths and Opportunities’, released on Tuesday, the World Bank says by imposing an exit tax on IIT graduates and other professionals, who leave the country after receiving subsidised education, the government can collect over $1 billion (about Rs 4,400 crore) per annum. This figure is from students going to the US alone. Take into account professionals leaving for the Gulf and other countries, and the total could well exceed the collection from the education cess, which was around Rs 5,000 crore.

I would rather levy a income-tax (however of very low rate) the NRIs (Non-resident Indians) who did their professional education through any publicly funded institution. Here is Jagadish Bhagwati supporting this idea.

However, the diaspora approach is incomplete unless the benefits are balanced by some obligations, such as the taxation of citizens living abroad. The United States already employs this practice. This author first recommended this approach for developing countries during the 1960s, and the proposal has been revived today. Estimates made by the scholars Mihir Desai, Devesh Kapur, and John McHale demonstrate that even a slight tax on Indian nationals abroad would substantially raise Indian government revenues. The revenue potential is vast because the aggregate income of Indian-born residents in the United States is 10 percent of India's national income, even though such residents account for just 0.1 percent of the American population.

Revenue thus generated can be used to continue funding the institutions and also can be used to give bonuses to the staff.

Comments

[AAA]

Government and new tax !!!
Why ask people to fill the pockets of corrupted officials, just do the right thing in society.

[ashish]

"Can a US citizen working in India, get a tax break in India for income earned in India?"

The answer is yes. It is called a foreign tax credit.

As I said, Indian government can tax the NRIs at a very low rate and also after applying tax credit for US federal tax payment. A tax treaty will probably make it easier for the IRS to give tax credit for the NRI tax.

As for the exit tax, how will a recent graduate be able to pay that tax considering that he doesn't have enough income?

Yes, you should tax people who haven't graduated from the public school. But I am focusing on the value add coming from government funded higher education institutions. Government is essentially engaging in a pure charity there. It needs to recover its investment.

And not, it does not have to a lifelong tax. I am sure actuarial calculations can be done to figure out the rate and duration of the tax to recovery government investment in higher education.

[Mihir Sambhus]

Hi Ashish,

How would the logistics work though?

Why would US government agree to NRIs paying tax to Indian government for income earned in US and then getting a tax break in US for that amount? Wouldnt that be unfair to US?

Can a US citizen working in India, get a tax break in India for income earned in India?

Thats where I believe the tax accord/treaty needs to be put in place.

Also to your point of public institutions, why only restrict to students of public insitutions, and why for the rest of the life??

My point was that if there has to be such a tax for public institution students, the only logical way to have it would be as suggested an emigrant tax.

thanks
Mihir

[ashish]

Mihir,
I don't know about tax treaty but I know US government currently taxes all its overseas citizen on their worldwide income. That means, Indian government can also do the same. And you can always get foriegn tax credit. That is, when NRIs first pay US tax, Indian government will have to give them tax credit for that amount when calculating Indian taxes. Or, they can first pay Indian government and then get tax credit with US government for the US tax they owe the US government.
It is a pretty standard practice when two jurisdiction want to tax you on the same income. It also applies between california state income tax and US federal income tax.

[Mihir Sambhus]

To make this work, India needs good tax accord with USA and other countries. Else why should NRIs pay India 10-20% tax in addition to paying the US govt about 40% tax??

I would gladly pay Indian govt 10% tax if I get tax breaks in US. Else it would be a really hard sell as to why I should be paying Indian govt for earning in US! Whether I studied in a public or private institution in India becomes irrelevant at this juncture as my pay would not necessarily be proportional to what I learned there and so charging a percentage of my current pay for my education in india 10 years back isnt justified.

To me an emigrant tax makes more sense. Like what government medical institutions charge if students dont complete a mandatory 1 year rural internship. That reflects what the govt spends relative to then. I dont want to be paying the govt for the rest of my life just because I went to a govt college!

-Mihir
(I have included this post on my blog as well)

[Ashish Hanwadikar]

"Indeed, the Government should look to recover full costs (for the subsidised higher education provided to students) from all students through long term (15 to 20 year) loans, not just from those going abroad for work."

That what you wrote on your blog post. Also, the problems that you mentioned about taxes were specific to the exit tax.

I am talking about income taxes which are due only when you have income above the standard deduction and after all exemptions are applied. So, students should not have any problem paying them once they start earning.

Also, better education translates into higher tax revenues and this gives an incentive to have the proper curiculum and facilities.

[Satya]

I think you have misunderstood what I said. On my blog post, I had suggested that all students (not just those who go abroad) could be asked to pay back the loans beginning __from the time they land their first job__. I was not talking about the government offering loans, but the banks (whether private or public sector is immaterial). The banks will get customers who are basically sound, just like home loan customers. The demand for education loans will be far higher than that for home loans and also far more stable since the speculative investment will be absent in the case of education loans.

The problem with taxes are many - I've pointed the possible problems on my blog post.
We shouldn't look at recovery (either through taxes or as loans) as ways to earn "higher reward". Rather we ought to look at it as a means of enabling each student to pay for his/her education over a long period of time out of his/her earnings. As long as there is a steady flow of students in and out each year, the finances should be stable.

[Ashish]

The problem with student loans is that they are due whether the student earns money after graduating or not! The fact that you are talking about government and not private parties offering student loans suggests that they are not viable.

Taxes (either private or government levied) on the other hand allows those with capital and savings to bear the risk of student default (in case students don't earn enough) and in return they earn higher reward (taxes are proportional to the income of the students and not dependent on the original loan amounts). This is a win-win situation for both the students and the financers.

Plus, we use a portion of tax revenues from the students to give bonuses to the professors then we can increase the incentives for quality education.

[Satya]

I would rather not levy anything in the form of a tax, but would rather ask every student of higher education to pay the full fee (without any subsidy) and offer long term loans to students to enable them to pay for their higher education. See my blog post at http://prayatna.typepad.com/education/2005/07/world_bank_prop.html on this.