A Budgetary Report Card
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A major initiative towards fiscal prudence was the adoption of the Fiscal Responsibility and Budget Management Act, 2003 (FRBM Act). Under the original FRBM Bill, the deadline proposed to eliminate the revenue deficit was 2005-06. That time frame proved too ambitious. The FRBM Act, as passed, revised this deadline to 2007-08. In Budget 2004, the finance minister further extended this to 2008-09, arguing that it was more realistic.
The Kelkar Task Force Report suggested that the government focus on widening the tax base rather than increasing tax rates, for vertical and horizontal tax equity. The report added that to establish a world-class tax system, the government should move towards an effective and efficient compliance system by using information technology. The goods and services tax (GST), at both central and state levels, was also proposed as an appropriate consumption tax model.
To simplify procedures and reduce compliance costs, the government initiated reforms in tax administration by introducing the e-return and e-payment facilities in both direct and indirect taxes. To facilitate smooth transition to the GST, the excise and service tax credit rules were integrated. To keep the commitment of bringing down the customs duty rates at par with the Asean levels, the peak rate of customs duty has been reduced to the present 10 per cent.
Gross tax revenues have grown by 19.9 per cent, 20 per cent and 27.8 per cent, respectively, in the first three years of the UPA government. The tax to GDP ratio has increased from 9.2 per cent in 2003-04 to 11.4 per cent in 2006-07.
Measures have been taken to widen the tax base by reducing the tax rates, shifting the burden of tax from production to consumption, taxing value addition in goods and services and simplifying the tax administration. But several issues are unresolved: the fate of various concessions and exemptions in our fiscal regime, administrative reform and aligning tax policy with the liberalised regulatory regime, whether in outbound investments or the introduction of the limited liability partnership concept.
Have governments done well in raising tax collections? For robust analysis, it is important to look at the figures of revenues foregone by the government. The charts (see ‘In Absolute Numbers’ and ‘A Relative Analysis’) depict the pattern of tax foregone during 2005-06 and 2006-07 in both direct and indirect taxes.
On an annual basis, the government gives up almost 50 per cent of gross revenue collections because of exemptions and concessions to various sectors. The largest loss in 2005-06 was due to various incentives given to exporters and importers (customs duty). In 2006-07, lost revenues attributable to customs duty came down but the losses attributable to excise duty went up, when the area based exemptions became operational. The charts suggest that while the government may be taking steps to increase revenues, it is not able to stop these large leaks that impact economic growth significantly.
Comply Or Bbe Sued?
The total number of tax assessees grew from 26.2 million to 29.8 million from 2001-02 to 2005-06. Non-corporate assessees constituted 98.68 per cent of the total tax base. Government policies have not been successful in widening the tax base beyond firms. Tax disputes also have significant cost implications for both businesses and government. The table above indicates the large amounts in litigation, in both direct and indirect taxes.
Although corporate tax is not the largest contributor to tax revenue, it is one of the major contributors to tax disputes. The absence of requisite awareness amongst tax payers, as well as the tax administrators, is the primary reason for the current state of affairs. Judicial pronouncements displaying divergent views aggravate the problem. Could it be that a part of the increase in tax collections can be attributed to the collection of arrears, and not necessarily because of tax reforms? Given the litigious nature of tax authorities could it also be that high collections are the result of a multiplicity of rates?
A Possible Agenda
A recent PricewaterhouseCoopers-World Bank Study indicates that the total tax contribution (as defined in the study) of a representative company in India (based on a sample taken for the world-wide study) could be as high as 80 per cent. There are many ways by which the government could reduce this. These range from modification of tax laws to reducing compliance costs and enabling a tax-payer-friendly administration. There is also merit in consolidating some taxes while eliminating some others. Independently, one key measure is to put in place a suitable dispute redressal mechanism. Clearly, there is some way to go before India can join the ranks of countries with user-friendly, broadbased and moderate tax regimes.
The author is the Executive Director, Pricewaterhouse Coopers
(Businessworld Issue 25 Feb-3 Mar 2008)