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What Is Missing In The Action

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Budget 2012-13 does not reduce the government's expenditure in any significant way. And it takes only the tiniest steps towards the goods and services tax (GST) and the direct tax code (DTC). Specific dates for the introduction of both — a goal that has been missed for several years now and one that corporate India has been awaiting — still remains elusive.

According to tax experts, perhaps the most significant step the government has taken in this budget is the introduction of the negative list in service taxes and an announced intention of moving towards direct transfer of subsidies (fertilisers and fuel). According to Satya Poddar, partner at consultancy firm Ernst & Young, finance minister Pranab Mukherjee moved to a negative list concept consistent with the GST.

"Also, introducing a unified tax code for services and excise tax is a step in that direction. But other than that, the minister has just stayed the course. It's like when in doubt, stay silent," he says. Poddar argues that given the financial compulsions this year, it is in fact to the credit of the finance ministry that it has not "raised all kinds of taxes". "I would say no news is good news," he adds.

The Tax Route
The budget also relies heavily on a huge mop-up of indirect tax — amounting to Rs 1,06,338 crore on account of customs, excise and service tax to bridge its deficit numbers. This is expected to help the government reduce its fiscal deficit numbers next year (the target for 2012-13 is 5.1 per cent of gross domestic product).

That said, tax experts are doubtful of whether the assumptions on the tax front are realistic.

"Mukherjee is looking at raising Rs 43,000-odd crore through excise duties. But has he factored in the impact on compliance rates? asks a former finance ministry official who is an expert on tax matters. "With a 20 per cent increase in the rate, you can bet that compliance will fall. I will be surprised if any of these numbers materialise." On the service tax side, the finance ministry has budgeted for a Rs 29,000-crore increase (budget estimate 2012-13 over revised estimate 2011-12). "But most of that —almost Rs 20,000 crore — is on account of the rate increase. The increase in the service tax base is likely to yield only around Rs 8,000-9,000 crore of revenue," says another expert. So, compliance becomes extremely important for meeting the assumptions.

On direct taxes too, analysts are critical of the increase in the exemption limit — which is aimed at helping middle income families, while hiking service and excise tax rates, which will end up hurting the poorest sections. "At a broader level, this is like offering benefits to you, me and my neighbour at the expense of my maid-servant. Goods and services are consumed by all levels of society," says a Delhi-based chartered accountant. Even if one looks at the raised exemption limit, experts feel that it is too small to be of any significance. "This is just a bit of housekeeping. With inflation remaining at roughly 10 per cent through the year, the hike in exemption limit is no increase in real terms," says Poddar.

Parthasarathi Shome, a leading tax economist and former advisor to the finance minister, is also critical of the move to align the service tax and excise rates. "The excise rate at the center is the goods rate up to the manufacturing level. Then, a further excise rate is added over and above this by the states. This means that the goods side is getting ‘overtaxed', if the service tax rate is 12 per cent," he says.

Shome argues that instead of offering selective incentives to some sectors, the government should have looked at broader incentives to spur growth like "accelerated depreciation". "Offering select incentives to some industries creates all sorts of distortions by skewing relative prices," adds Shome. In his view, the only pro-reform and positive step in the budget is the introduction of the negative list for services.

If the budget failed to move towards real reform on the tax front, there were no real or sub-stantial cuts in expenditure either. Although non-Plan revenue expenditure is estimated to see a modest increase of 6.1 per cent in the coming financial year, this is subject to the government not resorting to "substantive augmentation through supplementary demand for grants during the course of the year". There is a serious risk in these projections going by the ministry's own admission.

Subsidies are estimated to decline in the coming year — from Rs 2,16,297 crore in revised estimate 2011-12 to Rs 1,90,015 crore in budget estimate 2012-13. But this, too, is based on the assumption that policy measures will be undertaken to keep petroleum (read: hike in fuel prices domestically) and fertiliser subsidies at levels below the current year requirement.

(This story was published in Businessworld Issue Dated 26-03-2012)