Thought
Leadership

Why Community Development Certificates?

Inclusive development has gained its due attention globally and every country has committed itself to achieve the socially inclusive growth parameters. To achieve them and sustain the economic growth it is imperative that social sector agenda is given its due priority to bridge the socio-economic and digital divide. To shift the paradigm from a compliance culture, encouraging entrepreneurship in social sector through an incentivizing framework of tradable economic instrument will be the game changer and this is where Community Development Certificate (CDC) will play a pivotal role.

The idea

This will be earned through a public private community partnership model by social entrepreneurs and will enable utilization of a combination of inherent goodness of human nature with economic and efficiency know-how of an entrepreneur.

One way to enhance the efficiency of development projects could be to engage with the corporate sector in this space. The Corporate sector has standardised processes and systems ingrained in their working culture, which enables them to achieve results with greater efficiency. This is demonstrated by the fact that in 2011, 111 of the top 175 global economic entities were corporations. Of this, the ‘net worth’ of three such corporations (Royal Dutch Shell, Exxon Mobil and Wal-Mart Stores) individually were larger than the GDP of about 110 countries (taken alone). In fact, taken together, the Fortune 500 companies, with a combined worth of US$11.8 trillion, form the world’s second largest economy.

If the professional expertise and resources of the corporate sector can be brought into the human development space, it could greatly increase the scale and effectiveness of human development initiatives, thus enabling a larger ‘impact’. Community Development Certificates (CDCs) are one way in which this could be done. CDCs are proposed to be awarded against measurable social impact in pre-defined human development sectors. Corporates bidding for certain defined government would be required to furnish CDCs as a precondition for bidding. This would create a market for such certificates resulting in corporates either investing in CDC generating projects or buying CDCs from the market.

The demand for CDCs would further encourage other entities to invest in production of CDCs, leading to enhanced job creation. Therefore, through their trade, CDCs would facilitate increased investment in effective development projects and help further the government’s agenda of social and financial inclusion, while on the other hand; increased competition in the development space would also lead to enhanced efficiency of existing NGOs and social enterprises in this space.

The Thought

This paper seeks to explore a possible solution in this direction and to the development of the degraded forest lands for environmental sustainability and sustainable infrastructural growth of the countries across the world. A non-commercial initiative with an involvement of private sector organizations in this exercise to reforest and maintain degraded forest land patches as part of Corporate Social Responsibility initiative. These organizations will in turn be rewarded by awarding a ‘Grow Forest Certificate (GFC). GFCs will be awarded by state nodal agencies after scrutinizing the redevelopment of the forest lands over the period of three years, based on the survival of those plants.

Why Grow Forest Certificate?

Biodiversity exists in a fragile chain of mutual interdependence and any change in this balance creates wider ripples. Trees and forests form a large percentage of the Biodiversity that exists on our planet. Since ages past there has been a harmony of existence between forests and us. However, due to advancements in civilization there has been a tussle between humans and forests.

Infrastructure is pivotal to development of economies and therefore better standards of living for the people across the globe. It is due to this fact that more and more land is being claimed for developmental initiatives. In order to achieve exponential growth without impacting capability to grow sufficient volume of crops and feeding citizens more and more forest land is being claimed. As developing any project, particularly power projects on arable land parcels, except under compulsion is a future threat to food security. It should be noted that erratic climatic conditions are already endangering the world’s food security.

A steadily increasing demand of fossil fuels has led to the widespread exploration and development of natural reserves in the world. As one can see that most of these coal reserves overlap with the forest areas is further adding to world’s vows of goals and objectives to achieve power for all. Any attempt to access these reserves in these forest areas would lead to inadvertent changes in the ecosystem, thereby endangering the future generations. The root cause of many of the challenges we are facing in present times can be traced back to forest degradation.

On the flip side, these fossil reserves are the major contributors of our energy security today and for the foreseeable future. So a fine balance is needed for exploitation of these valuable reserves at the same time managing to sustain the ecological balance. The current policy frameworks address the issue of land diversion for industrial purpose solely in a quantitative manner.

As per the current framework the developers seeking diversion of forest land needs to offer alternate revenue land to concerned forest departments in lieu of forest land being diverted. This has resulted in only quantitative conservation of forest land. However the on ground picture depicts a sad story, wherein rich 5 forests are traded with revenue lands and aforestration of these revenue lands is a big question mark – not measured and accounted for! Hence, the policy makers have to develop a sustainable solution wherein the forest conservation activities result in sustainable forest cover in qualitative terms and not quantitative.

India has low tax revenues (as % of GDP) compared to rest of the world. The 37.7 per cent share of direct taxes to India’s total taxes is lower and regressive compared to developing countries such as South Africa (57.5 per cent), Indonesia (55.85 per cent) and Russia (41.3 per cent). Developed G20 countries have a greater share of direct taxes as part of total tax revenues, e.g. in the US this is 75.8 per cent and in UK it is 60.9 per cent.

In the past four years, the share of indirect tax in the government’s total tax kitty rose from 39.2 per cent in FY10 to 46.9 per cent in FY13. And, there has been a corresponding fall in the contribution from direct taxes as share of GDP. Indirect taxes are like an across-the-board consumption tax, that hits the poor more than the rich. As the poor devote a higher share of their incremental income to consumption, a greater share of their income is spent on taxes than the rich whose consumption to income ratio is lower. This lowers overall demand in the economy and economic growth suffers.

Improving direct tax collections can help reduce indirect tax and increase total tax revenue. Direct taxes such as personal income taxes are progressive, with higher earners paying more than those at the lower end of the pyramid. Businesses, pay corporate income taxes only if they make profits and enjoy tax breaks for capex in the form of a rebate on depreciation allowances and interest payments. This encourages capital expenditure that helps the economy to grow faster. Indirect taxes such as excise, Customs, sales and service taxes, on the other hand, have to be paid regardless of a company’s profitability. This hurts during an economic slowdown, when demand is down and customers hunt for bargains. An efficient tax system aids economic growth, while infirmities in the taxation systems hurts investments and growth. Direct taxes, while economically efficient, are tougher to collect than indirect ones, collected at the point of economic activity — production (excise and service tax), trade (Customs duty) and purchase (sales taxes). But addressing tax collection gaps and providing one-time voluntary disclosure schemes could help reduce leakage and improve direct tax collections.

The solution for our country’s low tax – GDP ratio could lie in addressing Direct tax gap especially Individual Income tax. It is estimated that black money constitutes 19 to 21% of GDP in India. This is more than our total tax revenue – GDP share of 15.5%, pointing to a significant tax gap i.e. Difference between estimated tax revenues and actual tax revenues. There is potential to double our Individual Income tax collection from current ~1,48,000 crs to nearly 3 lk crore. This paper discusses scope for improving Income tax collections and reducing direct tax gap by addressing non-reporting and under-reporting of Individual Income Tax.