Taxation has to be based on capacity to pay: Kofi Annan

Annan: As we look around the world today, we are seeing a gap between the rich and the poor expand. In fact there is a very interesting statistics which came out just a week ago indicating that the richest 85 people in the world have as much money as the poorest 3.5 billion. We need to do whatever we can to bridge that gap and ensure that the gap between the rich and the poor within and between countries do not expand. Governments have to focus attention on the welfare of the people. By that, I mean ensure education, health, ensuring that they have good drinking water and the basic amenities for life. Also to ensure that there is equal access to opportunities.

Q: How do governments ensure equal access to opportunities? One way of looking at it is through a process of subsidies which is what we seem to be doing at this point in time in countries like India. Other ideas in terms of revenue mobilization that governments around the world today are looking at is things like bringing estate taxes or estate duties back. Taxing the super rich for instance. Are you in favour of that sort of revenue mobilization?

Annan: Taxation has to be progressive. Taxation has to be based on capacity to pay. That approach is not something I would fight with. In fact in many societies you do tax the rich more and use their resources. Tax the rich, tax the companies and use the resources to improve the welfare of the people.

Murthy: It is very important for us to remember that our priority in India today is creation of jobs. That is the only way we can solve the problem of poverty. If we want to do that taxation has to be at a level which will attract more and more investment both from domestic investors as well as foreign investors. So, we have to walk a very fine line between our desire to mobilize more and more taxes or having higher percentage of taxes and our ability to create more and more jobs. This is something we have to debate and discuss very carefully before we go ahead and say that we will tax the rich at extremely high rates.

Q: Do you perhaps think that we could see a review of the tax on the super rich that was imposed by Chidambaram if there is a new government that comes in place which is a non-Congress, non-UPA government? Do you believe that this tax should be done away with?

Murthy: What P Chidambaram did is really not punishing rate. A small percentage of additional taxes for the super rich is perfectly okay. I don’t see any issue. In fact, UK and most European countries have much higher level of taxation than India. So, I don’t think that is an issue. All that I was saying was you should not get to 75 percent like it happened in France.

Q: Let me move to another issue that corporate India has been grappling with at this point in time and that is the issue of corporate social responsibility (CSR) with the new Companies Act which has been passed by parliament in India to make CSR in a sense mandatory. You were at the forefront of launching the UN Global Compact movement an initiative that is over a decade long. While there have been a lot of positives that the movement has thrown up there is also criticism or skepticism on the efficacy of that. There are questions on whether the UN Global Compact needs more teeth? Whether it needs a better governance system to ensure accountability? How would you rate this success and the failures to your mind of the UN Global Compact?

Annan: If I may start with the Global Compact, very few companies signed on. Today we have well over 8000 companies around the world who are member of the Global Compact. The issues you raised were raised then in 1999 when I first launched the Compact with civil society groups in particular saying that secretary general what you have suggested the companies should undertake, it must be mandatory, they should be forced to do it. As secretary general I had no authority to force any company to do anything they did not want to do. Basically what we tried to do was to get the companies to understand that they operate within community and the health of the community is also important for their business and that doing good is good for business. We also felt using transparency you can get a lot done.

Q: Do you then believe that even today a more soft consensual approach should be what governments should adopt as far as corporate social responsibility is concerned?

Annan: The responsibilities of the government are different. Responsibility of an individual like me or the UN or the role companies decide to play is also quite different. You do have regulatory responsibilities for the government. Governments have to create the right environment for corporations to operate and encourage them to the right things. Companies can volunteer to do what is right without waiting for governments to pass laws. So, the voluntary, transparent approach to some of these issues and the way we tackle them is very important and that was the spirit behind the Global Compact which I think has worked reasonably well.

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Q: I know that you have always been in favour of a voluntary consensual approach as far as corporate social responsibility (CSR) is concerned. When we talk about government systems to ensure corporate accountability perhaps technology will ensure that nobody can actually be in hiding forever. So, instead of focusing on adding on more regulation the fact is that technology makes the whole process more transparent. So, do you believe that the power of technology will ensure accountability better than regulation?

Murthy: In some sense you are right. Technology enhances transparency and enhances accountability. So, therefore I am all for a voluntary system of compliance by the corporations in so far as corporate social responsibility is concerned. As long as they are asked to report what they have done, that itself will be a first good step for corporations to do more and more to gain the good will of the society. At the end of the day, we have to realise that there is no corporation in the world which has survived and succeeded over a long period of time without earning the good will of the society.

Annan: I agree entirely with what Murthy has said. However, we also have to understand that the social media, the computers and all these are tools. You have to have the mindset, the approach. He has to strive now to be able to get into social responsibility, determined to use transparency as a powerful tool to report and by comparison push other companies to go the same direction.

Q: But do you believe post the 2008 financial crisis where capitalism as we know of it today has been questioned, there has been a crisis of capitalism in a sense the message that both of you are talking about has been reinforced that corporate leaders around the world have now realised and understood that they cannot run away from corporate social responsibility, they cannot run away from creating sustainable businesses, from creating fair and ethical businesses or do you think that this is only till the next crisis and again this message is going to be forgotten?

Annan: During the last crisis in 2008-2009 companies became very much aware of the crisis. They also realised that they have lost the trust of the people particularly, bankers and that something needed to be done. That is when the G20 was brought together and lots of discussions about reforming the system were raised. However, now that things seem to be going a little better, people seem to be back in a way from looking at the issues and putting in place the systems, the controls and the regulations that are required. I hope that will not be allowed to happen and the right regulatory systems would be put in place to ensure that we don’t repeat what happened in the next 10 years or so.

Q: One of the other causalities post the 2008 crisis has been the negotiations as far as climate change is concerned because suddenly climate change which is anyways sort of low on the order of priorities as far as political institutions were concerned vanished off the radar because people had fiscal challenges to deal with, people had the impending crisis to deal with. Are you feeling more confident that we could perhaps see a positive solution emerge as far as on-going negotiations are concerned by 2015?

Annan: I am not sure it is going to be that easy. Yes, climate change campaign has run out of steam in some quarters. Europe for example was very active and was leading the effort. I hope it will come back to lead again. When there is economic crisis, there is tendency for people to think let us focus on serving the crisis rather than worry about climate change. What they don’t understand is that climate change is with us and is one of the most dangerous phenomena that we are facing today.

It is a threat to our security, our source of food, our fresh water sources, so, we need to take it seriously. However, I would also say it is not an issue for governments alone. Individuals must get involved and individuals must pay attention to the environment. They have power, as individuals you and me have power. We have power by the choices we make. What we buy when we go to the supermarket, the way we use our vote, what we tell the politicians about environment. So, we also have to get involved.

Q: Do you believe that we are going to see any positive movement on issues like subsidies as far as fossil fuels are concerned, whether it is the developed nations or the developing nations? It is an even bigger challenge for the developing nations because fossil fuels to a large extent subsidised do you see any sort of positive transition emerging there as far as crucial and controversial issues like subsidising fossil fuels are concerned?

Annan: It is a tough issue, but it will have to be dealt with. We have to get across a message that there is a cost and that the polluter has to pay. The question of subsidies will have to be tackled by many governments. What we are not going to get is a big universal agreement, this year or next year, but I see that many governments are taking individual initiatives to tackle climate change. China is doing it, Denmark is doing it and I am sure that our pockets in India that is doing it too. Eventually, we will need to find a way of linking up. So, the fact that we have been slow internationally and on the universal agreement does not mean we should not do anything.

Q: Let me ask you about an issue that we have talked a fair amount about in India and this is this whole business of reverse innovation, frugal engineering, has the time now come to address the issue of dealing with consumers at the bottom of the pyramid differently?

Annan: Yes, we need to be creative as to how we deal with the problems of the poor or those as you described as those at the bottom of the pyramid. The poor have assets and sometimes we should be able to help them collateralise it.

Studies have been done in poor communities. They did one in Egypt and to their surprise, they discovered people in the poor community were sitting on about USD 35 billion but they had no access to the banks, they couldn’t have the documents to be able to use it as collateral to raise loans.

We should also look at their needs and what is helpful for them, not assume that what we produce for the upper middle class or the middle class would suite them. A good example is what happened in Kenya where they came up with M-Pesa where you can pay through your telephone system, your cell phone and even make savings through the cell phone.

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With that move they brought 17 million people into the financial system. These were people who were outside the system, who did not go to the high street banks. The high street banks did not think of them nor their needs. Now there are people who are opening banks right in the markets.

Murthy: If you want to help the poor in India, if the government wants to help the poor in India then they have to encourage companies to use the power of technology. They have to encourage companies to bring in economies of scale, they have to help companies to avoid wastage of food.

Thirty percent of grains in India are supposed to be rotting. If you did many of these, I have no doubt at all that our poor will benefit. Therefore, we have to put in place policies that will help 1.2 billion Indians as against protecting the interest of probably 1,00,000 Indians. If we did that I have no doubt at all that we will help the vast majority of poor in the country.

Q: The government has put out this vision 2020 of trying to nurture and foster research and development, science in India but the fact of the matter is the statistics tell a very different story. The comparison with China we pale in every aspect when it comes to research and development in terms of spending, in terms of the number of patents that we apply for and so on and so forth. What do you think can be done both at the government level as well as the private sector end to actually nurture spirit of scientific enquiry and ofcourse a move towards enhancing research and development that is relevant to a country like India?

Annan: Recently I have been encouraged reading that the Indian government wants to increase the amount of money it spends on research to 2 percent of the GDP. Currently, it is at about 0.25 percent. However, what companies like Infosys are also doing is extremely important.

Apart from the government, the increasing resources for research should have incentives for companies to do innovation, to do research and if these researches are properly directed they will help us resolve some of the problems that we face today.

Murthy: I would say that there is a lot that the government can do. It has done lot of good things so far including desire to increase the budget for research and you must make it easy for Indian researchers to communicate and work with foreign researchers particularly in the US, Europe, Australia etc. Similarly we should make it easy for world class researchers to come and visit India and spend some time. You should make it easy for our students to work with students there, faculty there. I think those are the areas which will add tremendous value.

Q: You were at Davos, you also met with the Iranian President and I know that the Elders have enthusiastically welcomed the P5+1 interim deal with Iran. You believe that this is a historic opportunity to rebuild connections with Iran. Do you feel that the geopolitical risks that the world faces today have lessened on account of this interim deal?

Annan: The interim deal is a positive sign. It is an important development but we are not there yet. It is important for them to sustain the effort and get a definite and final agreement on the nuclear issue and begin to work with Iran on some of the geopolitical issues in the region. I don’t see for example how one can resolve Syria without the participation of Iran.

Iran has an important role to play in the region and I would hope that as we move forward to resolve the nuclear issue the cooperation will be expanded to broader areas.

Q: Are you feeling confident that we could see this deal being operationalized fairly swiftly and you were talking about engaging Iran with regards to Syria but Iran has always supported the Assad regime. Do you believe that countries like the US will be in favour of Iran playing any role as far as the Syrian conflict is concerned?

Annan: I was in Iran last week. We were leading the team of Elders and we met the Iranian leadership and discussed quite a lot of issues not just the nuclear issue. We discussed Syria, tensions in the region, the withdrawal of the US troops from Afghanistan and the broader Middle East and the developments there.

We have to understand that enmity between nations and people do not last forever. It is possible and I think we will see it and I hope sooner rather than later that Iran would come back to the international fold and play the role that it should play. The divisions we see in the world today whether in the Security Council or the region it is only a creating a situation where more and more Syrians are dying. Our divisions are killing Syrians. We need to have sound policies and we have to understand that bad policies kill people.