Column

Mukul G Asher & Amarendu Nandy

Proposal to recover subsidy amount from graduates leaving the country is an inconsequential one

The Parliamentary standing committee of the human resource development ministry recently recommended serious consideration of an exit tax on students who have graduated from premier institutions receiving massive subsidies, going abroad for employment. The details are unclear, but the exit tax is intended to be a one-time tax, collected at the time of departure before the student begins to earn income.

The committee has argued that an exit tax is an appropriate instrument for recovering subsidies given to those leaving the country permanently. According to one set of estimates, the government subsidises nearly Rs 1.5 lakh per annum for every IIT graduate, and nearly Rs 3.5 lakh per year for every IIM graduate.

It is striking that the subsidy for a management student is more than twice that for an engineering student, when the later arguably has much greater social utility at the current stage of India’s development. To the extent many IIT students also undertake studies at the IIM, subsidies per person are much higher. The public policies concerning intra-higher education subsidy, however, deserves a separate column.

The committee appears to lean towards the argument that the revenue from the exit tax will not only lead to recovery of subsidy, which can be reallocated to benefit the country, but could also act as a deterrent to the graduates going abroad.

The two objectives are in conflict as success in preventing graduates going abroad will imply that little revenue will be generated from the exit tax.

While the concept of taxing graduates going abroad is not new in the economic development literature, the objectives of the tax and the design structures have tended to vary substantially among various proposals.

In the 1970s, Professor Jagdish Bhagwati and others had proposed an annual income tax on emigrants from developing countries, to be collected by the income tax authorities of the industrial countries. The resulting tax receipts were to be remitted back to the respective developing countries; or in some versions, remitted to a special fund for development. The proposals, however, were not implemented due to their high transaction costs, and ambiguous legal basis.

There have also been proposals to use a multilateral regime (or a bilateral treaty), which would permit reciprocal remitting of social security taxes paid by nationals of other countries. Some countries, such as the US, tax individuals on the basis of nationality on their worldwide income, subject to bilateral tax treaties and certain special provisions. Since India is among a handful of countries to adopt the nationality criterion, those who are Indian nationals as well as Indian resident tax payers (this could occur if there is a reverse brain drain of Indian nationals), some Indian graduates will be subject to a version of exit tax. A separate exit tax as proposed by the committee could be inequitable for this group of Indian citizens.

The committee’s proposal for an exit tax at the present juncture represents an inferior and ineffective instrument for subsidy recovery and resulting revenue generation, as well as for deterring graduates from seeking employment abroad.

First, uniform low pricing, well below the true economic cost, is neither efficient, nor equitable for any good or service. This is particularly true in the provision of higher education appropriate to the 21st century Indian economy and society. Rationalisation of the fee structure and differential economic-need-based pricing is a far better instrument for raising resources than an exit tax.

Technically, differential pricing can be achieved through a combination of various instruments such as partial grants, scholarships, vouchers, and provision of part-time employment. The financing sources for higher education must be diversified to include endowment funds, alumni support, and more efficient and remunerative use of assets and facilities of state institutions. This requires more sophisticated thinking about public policy and public management, the lack of which is apparent in the committee’s proposal.

Second, equating leaving the country after graduation (which may or may not result in permanent migration) with no economic contribution, simply because they go outside the tax ambit, is inappropriate. It is a misconception that you can be a saint only if you meditate in a temple. There is a need to understand the role of the Indian Diaspora (particularly the role of the IITians and IIM graduates settled abroad) in a more nuanced manner than implied by the exit tax proposal.

Third, an exit tax could have negative consequences for the economy and the country. India has been the largest recipient of remittances globally in 2006; and $25 billion generated from this source have been important contributor to managing trade deficit of $52 billion in 2005-06.

Export of talent has been a major competitive strength of India. Putting artificial barriers or disincentives for mobility of the skilled workforce distracts from the more vital task of creating social amenities, generating jobs, and encouraging entrepreneurship in India.

Professionals going abroad do not operate under monopolistic environment. In a globalised world, where barriers to skilled labour migration are increasingly loosening, there are enough sources for potential employers to source talent. As the proposal suggests, if the ultimate burden of such exit tax falls upon the employer, and the quantum is high, the Indian graduates may find themselves at a disadvantage in the international marketplace.

Finally, the proposed exit tax fails the test that a tax should be unambiguous, administratively feasible, and have low compliance costs. The cumulative burden on the people, of the ad-hoc cesses and taxes strongly favoured by the current UPA government, should also be taken into account.

It is time the stakeholders, particularly policymakers, recognised the urgency of introducing wide-ranging reforms in higher education, including the best mix of respective roles of public and private sectors.

Mukul G Asher: Professor of Public Policy, National University of Singapore

Amarendu Nandy: PhD student, LKY School of Public Policy, Singapore