Two-sided benefit

The economic survey of 2019-20 has called for extensive use of behavioural economics. A key area where this can work wonders is taxation. Several broad funds of the Central Government should be created such as the National Defence Fund, the National Education Fund, etc. A 200 per cent deduction should be given for donations to these funds.

This system has immense benefits for both business and government. The business can enhance its reputation by saying "We donated for our soldiers" by contributing to the National Defence Fund. The government gets Rs 50 instead of Rs 35. The business owner can support the cause he believes in, at a very low cost. A donation of Rs 50 requires an additional payment of just Rs 15. Unlike tax, there is a positive feeling attached in paying this 50. The business owner can get respect in his social group by saying "I donated Rs 50 lakh for the education of poor children" if he donates to the National Education Fund. Nobody will care if he says "I paid Rs 35 lakhs in income tax" because his friends will say, "obviously you did, otherwise the government would arrest you".'

The only benefit from paying your taxes is not having to pay penalties or having your assets attached. By donating, the personal benefits are substantial. You get a sense of personal satisfaction and enhanced respect. There are also clear business benefits to being a socially responsible entity. Consumers want to buy your products. Talented employees want to work for you. Investors want to invest in you. It makes complete sense to pay a little more for all these benefits. So it would often make sense even for a soulless corporation to donate. It would make sense for homo economicus, not just homo sapiens.

This is also a very good way to channelise people's sympathy and their desire to participate during national events such as a terror attack or a natural calamity. The government must actively seek donations. It is extremely important that money is collected as soon as disaster strikes. Public memory is short but the expenditure is drawn out. Rebuilding costs much more than rescue. But no one pays for rebuilding. Funds must be collected when newspaper headlines (and more importantly, Facebook newsfeeds) are with you. This means advertisements. The advertisements must clearly state the 200 per cent deduction. This will showcase that the government is committed to the cause as they are willing to forgo double the tax revenue for this cause.

Would it be unethical for the government to ask its citizens for money to do its job? Wouldn't it be more unethical to let people's sympathy go to waste, or worse, to let it go towards some unscrupulous NGOs?

The money goes straight to the department or ministry that needs it. This saves the trouble of going through the finance ministry for funds. Emergency funds can be raised easily by the respective ministry.

Recognition and appreciation can go a long way in getting people to donate. The lowest level can be an automated email by the recipient department thanking the donor. The highest level can be a trophy or medal awarded by the Prime Minister at an annual function. Just a few hours of the Prime Minister's time can help raise thousands of crores. Acknowledging the actual impact will take this even further. For example, a person who donates Rs 10 crores to the HRD ministry can be given a certificate that says, "Your donation has funded the education of 10,000 children".

There will be healthy competition on two sides: On the donors' side, taxpayers will compete to win the highest awards within their social

circle. This means more resources to fund public welfare. On the recipient's side, ministries and departments will compete to demonstrate that they are worthy of donations. The recipients that can achieve a greater impact for lesser money will be able to attract more donations.

The system is a wonderful win-win. The government gets more money. The taxpayers are much happier because they are donating, not paying a tax. The ministries perform better work to attract donations. There is no potential harm. At worst, taxpayers don't opt-in. In that case, they end up paying tax normally and nothing changes.

To be truly effective, the deduction needs to be insulated from Minimum Alternate Tax. This can be done by allowing a 200 per cent deduction while computing "book profits". The proposed Direct Tax Code is intended to modernise the income tax law. With the 200 per cent deduction, it can also become ground zero for behavioural economics in India.

(The author is a Chartered Accountant and Company Secretary topper with expertise in Corporate Affairs. The views expressed are strictly personal)