The word Arthashastra means 'Science of wealth creation'. Kautilya, however, used the word in a much broader context to include many of the activities of a state-economic, political, social, military and others that may affect its wealth. Kautilya's Arthashastra is a masterpiece particularly in the context of the time when the book was written. He seems to have an encyclopedic and all encompassing knowledge about different aspects of governing a monarchy such as administration, revenue, taxation, law, diplomacy, business and trade, coinage, agriculture and land tenure, labour, people and the society, etc. Kautilya emphasised that the State is sustained by the revenue it collects from its subjects. His ultimate objective was not to benefit the King, but to benefit the people. He thought a strong and wealthy monarchy would be in a position to protect the interest of the people against invasion by other kings.
Kautilya established the principles of taxation and the sources of revenue and expenditure. In essence, it is one of the earliest recorded guidelines of Public Finance. He also categorised types of revenue incomes and laid down the systems for audits which are comparable to existing mechanisms. Moreover, Kautiliya states, "that which remains after deducting all the expenditure already incurred and excluding all revenue to be realised is net balance (nívi) which may have been either just realised or brought forward." This concept is akin to the modern theory of fiscal balance and ideas of audit, and Kautilya can be credited for institutionalising such concepts in the framework of governance and policy.
Kautilya's discussion of taxation has several underlying principles – the taxing power of the state should be limited, tax should not be felt to be heavy or excessive, tax hikes should be introduced gradually, tax should be levied in the proper place, time and form, and tax level should be equitable and reasonable. Kautilya noted that a ruler should not tax at his pleasure. He took extreme care in avoiding fiscal tyranny and consequent public discontent. According to him, "Disloyal and indifferent subjects will endeavour to destroy even strong kings." He stressed that subjects should be taxed in such a way that they maintain their ability to bear future burden, and, if necessary, a heavier one. Increase in tax should be gradual during times of prosperity.
Even today, one of Kautilya's maxims on taxation is very much alive and calls for adherence by the governments all over the world. According to Kautilya, "Taxation should not be a painful process for the people. There should be leniency and caution while deciding the tax structure. Ideally, governments should collect taxes like a honeybee, which sucks just the right amount of honey from the flower so that both can survive. Taxes should be collected in small and not in large proportions." He did advocate proportionately higher income tax on the rich and higher sales tax on the luxury goods. However, to Kautilya, it was essential that a ruler supply sufficient overhead capital and developmental assistance, or encourage it through tax exemptions. Further, a King should direct expenditure to profitable projects and have in hand sufficient reserve of money, food, clothing, and ammunition to meet the need imposed by calamities, war or other emergencies. Many groups were exempt from tax either due to their inability to pay (handicapped conditions), or the service they were engaged in (priest). The land tax and tax on traders were collected only if there was a profit above the normal level. The schedule of taxes on production and sales was prepared after carefully calculating the cost of production and the normal profits, the length of time needed to sell the product, the level of unsold inventory, the fluctuations of the market, etc. Taxation by the state took into consideration the conditions necessary for ensuring the stability and welfare of the tax payer. Different kinds of taxes existed such as direct and indirect taxes, sales and excise taxes, income and value added taxes. It seems Kautilya's scheme of taxation involved the elements of sacrifice by the taxpayer, direct benefit to the taxpayers, redistribution of income (the state took care of the poor), and tax incentives for desired investments. One of the unique features of his tax policy was to allow for a normal amount of profit for businesses before the tax was collected. Kautilya's tax system seems quite comprehensive, particularly in light of the antiquity of his writing. However, some of his ideas on taxation existed in Indian literature even before Kautilya penned them.
Kautilya identified an exhaustive list as the sources of government revenue, and put the actual administration of revenue collection on the department under which that particular activity was covered. The Collector General (i.e., the chief of revenue) was to consolidate the revenue from all departments into the central treasury. Thus, an institutional mechanism for revenue collection was set up. The system is very similar to modern systems of revenue collection and management, whereby the actual collection was de-centralised while the consolidation and audit was centralised.
Sources of revenue mentioned in Arthasastra under their corresponding modern categories can be highlighted as below:
Corporate Taxes: The corporation or guild of artisans and handicrafts-men (kárusilpiganah)
Indirect Taxes: Liquor, slaughter of animals, threads, oils, ghee, sugar (kshára), the state goldsmith (sauvarnika), the warehouse of merchandise, rivers, ferries, boats, and ships, road-cess (vartani), ropes (rajjú) and ropes to bind thieves (chórarajjú) and taxes on minerals.
Land and Property Tax: Town houses and building sites (vástuka), pasture grounds, agricultural produce, flower gardens, fruit-gardens, vegetable gardens, wet fields. A large part of tax on agriculture was received in kind.
Customs duty: Sulka was collected on all imported goods at the city-gates and the work of collecting customs duty was supervised by Sulkadhyaksha, viz., Superintendent of customs.
Fees and Government Service charges: Tolls, fines, weights and measures, the town-clerk (nágaraka), the superintendent of coinage (lakshanádhyakshah), the superintendent of seals and passports.
Income Taxes: Produce from crown lands (sita), portion of produce payable to the government (bhága).
Entertainment taxes: Prostitutes taxes and gambling charges.
Items of expenditure were classified under 15 heads. This was known as Vyayasarira, 'the body of expenditure'. The majority of items involve expenditure on State accounts. Only a few may be regarded as constituting the privy purse of the King. Perhaps the most important public policy ideas in this section come from Kautilya's analysis of productive and capital expenditure as opposed to non-productive expenditure. In the Arthashastra, a clear distinction is made between revenue invested, i.e., capital expenditure and current expenditure. For Kautilya, there were two kinds of expenditure, viz., daily expenditure and profitable expenditure. Daily expenditure was the obligation of the State to maintain certain services and functions for the people, i.e., the day-to-day expenditure of running an administration. For Kautilya the 'expenditure' that earned revenue 'once in a paksha', a month, or in a year is called profitable expenditure. Kautilya understood that such profitable expenditure, in essence, puts a check on spending from the current account. Investment of capital (vikshépa) is a means to check expenditure (vyayapratyayah). Kautilya realises the importance of capital expenditure through which the State can earn revenue in the long run; he states, "the King will have to suffer in the end if he curtails the amount of expenditure on profitable works."
The emphasis on a proper system of audit and the quality of revenue administration is exceptional. In essence, it reflects Kautilya's focus on institution building and management.
Kautilya underlined the categories of works that needed to be done by the revenue department – "The business of upkeeping the government (samsthánam), the routine work (prachárah), the collection of necessaries of life, the collection and audit of all kinds of revenue; these constitute the work in hand. That which has been credited to the treasury; that which has been taken by the King; that which has been spent in connection with the capital city not entered (in the register) or continued from year before last, the royal command dictated or orally intimated to be entered (in the register), all these constitute the work accomplished. Preparation of plans for profitable works, balance of fines due, demand for arrears of revenue kept in abeyance, and examination of accounts, these constitute what is called part of work in hand."
The function of a 'wise collector-general', according to Kautilya, was 'increasing the income and decreasing the expenditure', a maxim that goes well with our current ideas of cutting down on fiscal deficit.
Kautilya clearly stated that the people's and therefore the State's prosperity depended on the conduct of government servants, yet another example of Kautilya's concern with governance and institutions. Kautilya was also against big government machinery, "dispensing with (the service of too many) government servants...is conducive to financial prosperity of the State."
Kautilya identified 40 different methods of embezzlement of public money, and prescribed the harshest punishment for such an offence. "Under the above circumstances (embezzlement), the persons concerned, such as the treasurer (nidháyaka), the prescriber (nibandhaka), the receiver (pratigráhaka), the payer (dáyaka), the person who caused the payment (dapaka), the ministerial servants of the officer (mantri-vaiyávrityakara) shall each be separately examined. If any one of them tells a lie, he shall receive the same punishment as the chief officer (yukta) who committed the offence."
Kautilya also understood the need for transparency during the investigation of public servants and the practice of whistleblowing on corrupt practices. "A proclamation in public (prachára) shall be made to the effect that whoever has suffered at the hands of this offender may make their grievances known to the King. Those who respond to the call shall receive such compensation as is equal to the loss they sustained."
Kautilya recommends that public servants, "while engaged in work, shall be daily examined; for men are naturally fickleminded and like horses at work, exhibit constant change in their temper. Hence the agency and tools, which they make use of, the place and time of the work they are engaged in, as well as the precise form of the work, the outlay, and the results, shall always be ascertained... hence the chief officer of each department (adhikarana) shall thoroughly scrutinise the real amount of the work done, the receipts realised from, and the expenditure incurred in that departmental work both in detail and in the aggregate."
Kautilya admitted that some amount of corruption would always exist and cannot be scrutinised perfectly, "It is possible to mark the movements of birds flying high up in the sky; but it is not possible to ascertain the movement of government servants with a hidden purpose." He therefore recommends the strictest punishment, both material and corporal, as a disincentive to cheat.
Kautilya had given detailed instructions on check-and-balance accounting and auditing for the royal treasury of the great Maurya Empire. However, Kautilya conceded that it is just as difficult to detect an appointed official's dishonesty, as it is to detect how much water a swimming fish drinks.
In the Arthashastra, fraud prevention as well as fraud detection has been highlighted. Kautilya had listed several ways of misappropriating public funds by way of fraud against which auditors at the royal treasury had to always be on their guard. Some of these frauds relevant in today's corporate environment are:
(a) Falsification (of date) with a motive of personal profit: Showing a later date than the one on which income was received or showing an earlier date than the one on which expenditure was incurred and using the proceeds in both cases for personal profit for a period.
(b) Misrepresentation (of income received or expense incurred) with a motive of personal profit:
(i) Revenue due on a given date is allowed to be collected at a later date for a consideration
(ii) Revenue not due till later is collected earlier by force or deceit but credited on due date
(iii) Revenue paid by one is credited in the name of another for a consideration
(iv) Revenue for treasury realised in the capacity of a collector is misappropriated by an individual by force or deceit
(c) Discrepancies (arising out of willful fraud) in:
(i) personally supervised work
(ii) account heads
(iii) labour and overhead charges
(iv) work measurement
(v) totalling
(vi) quantity
(vii) price
(viii) weights & measures
(ix) containers of goods
Actual income was calculated under the three major account heads:
(a) current income
(b) transferred income
(c) miscellaneous revenue
The last category had three further subdivisions which mainly included recovery of previously written-off debts, etc., realisable economies made in investment against planned budgets and any differential (value-added) income. In account books, every entry was to be recorded on the date of transaction, duly classified under the different heads on both sides – receipt and debit. Not maintaining a systematic and legible accounting record was a punishable offence as this was deemed a precursor to a fraud. An elaborate check and balance system was in place to ensure the timely submission of accounts and accounting for every transaction in minute detail.
In the event of a discrepancy after audit, the official concerned was made to pay a penalty at least equivalent to the discrepancy. With improved telecommunication and electronic fund transfers now available, the possibility of fraud and necessity of disciplined audit cannot be underestimated. If we systematically categorise the various financial frauds that are being unearthed by present-day auditors and investigators across the world, we will probably find that most of them can be roughly placed under one of the aforementioned Kautilyan classifications.