Administrative asymmetry

A welcome development on the fiscal front has been the toning up of tax administration, with initiatives such as the Tax Information Network (TIN). This and other measures have contributed significantly to the acceleration that has been seen in tax revenue. This year, total tax revenue of the central government will grow by close to 40 per cent, if not at a higher rate, compared to the Budget estimate of around 21 per cent. Economic buoyancy is an obvious reason for this, but cannot entirely explain the surge. More efficient administration is a significant contributor.

Unfortunately, however, as an article in yesterday's edition of this newspaper points out, the efficiency with which the finance ministry is collecting taxes is far ahead of the efficiency with which it refunds excess taxes collected. The article highlights the fact that, despite the notification of a refund mechanism on service tax paid by exporters of services over a year and a half ago, not one rupee has been refunded. More recently, an order was sent out requiring 80 per cent of the amount claimed to be paid out within 45 days, but even that has been met with typical governmental inertia. While the policy on exemptions and due refunds for specific activities and purchased services seems fairly clear, the delay in processing is attributed to the tendency of the tax authorities to examine every claim in minute detail, refusing to accept the self-assessment, which is an intrinsic requirement for such schemes to function efficiently.

On a broader note, recent experience clearly suggests a close correlation between simplification of the tax code and administrative efficiency. This is perhaps obvious to most people, if not everybody, but the underlying causal mechanism needs to be appreciated for its significance in tax policy and administration. The simpler the tax rules, the more transparent the self-assessment and, therefore, the less time that needs to be spent on scrutinising returns and refund claims. On the direct tax front, simpler rules, lower rates and more efficient enforcement have contributed to a sharp acceleration in revenue growth over the last few years. However, central excise revenue, once the most significant source of funds for the government, has been seriously lagging. While its base, the value of industrial output, is growing at around 15 per cent currently, collections are growing at about half that rate. The main reason for this discrepancy, according to most observers, is the huge number of exemptions that still plague the excise system. This necessarily means that every return has to be carefully scrutinised to ensure that the exemption being claimed is legitimate. The same mentality seems to prevail in dealing with refund claims on service taxes.

Having come so far down the road of fiscal reform, it is a shame that irritants in the form of exemptions and other procedural bottlenecks persist. The goal of tax policy should be to maximise revenue with maximum trust and minimum intrusiveness. This is best served by low and non-discriminatory rates of taxation, be they direct or indirect taxes. But even the most efficient tax system will falter if taxpayers are all deemed to be guilty until they are proven innocent. It is high time the approach of the tax authorities, particularly on the indirect tax front, was brought into consistency with the streamlining of tax rates and the improvements in the technology of enforcement.