Policy Wise

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The parliamentary committee on higher education has suggested the introduction of graduate tax in India,

Parliament’s standing committee on HRD ministry has recommended taxing students who take up overseas jobs after graduating from premier higher education institutions and their employers as well. [link]

The committee has made two curious observations. First, the said tax would only be imposed on graduates from premier institutions. One assumes that it would imply IIT/IIM graduates, and perhaps a few other institutions of national importance. One wonders if the government is acknowledging that the graduates from other institute are not really employable? Shouldn’t the government be more concerned with the income levels of the graduates rather than their institution? Second, the tax is meant only for graduates who take up overseas jobs since they apparently ”bring no value to the country”. While in the era of globalization, such insular thinking is despicable in it self, how does the government propose to impose taxes on those who work outside India? How would it verify their income levels? Most importantly, does it have the legal right to tax their income even if they retain their Indian passports? The government even proposes to tax the employers which would be plainly untenable.

Yes, graduate tax is currently used in a few countries, most noticeably Australia and New Zealand. However, in both these countries, it is meant for people who seek local employment. In the Australian system, those making more than a certain sum of money ( Aus $25000) are asked to pay 3% of their income as tax while those making more than Aus $ 46,000 oay 6%. The underlying logic being that those who have benefited from higher education should pay their just share, while the education of the less-successful ones would be subsidized by the state. While the Australian model makes some sense, the best system would be to abolish subsidies for higher education, offer government guaranteed loans to the poor with easy bank loans for the rest. A partial subsidy can be offered by calibrating the interest level to income (via a means test) with the poor paying lower than market interest rate.

Interestingly, graduate tax has its own shortcomings. In 1997, Lord Dearing published his report on higher education in England with the following concerns about graduate tax,

A graduate tax is attractive because it has the potential to secure large additional resources for higher education, but it provides no means by which individuals can pay their contribution upfront, and thus does not deliver additional funding in the short term. For the graduate, it is open-ended, resulting in those who are particularly successful being expected to contribute large sums. For institutions, it would not guarantee that the income from the tax would benefit them because, to do so, would cut across the general principle that tax revenue is not earmarked for particular services

Related reading: Abi’ post advocating a mechanism akin to graduate tax in India.

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