The central government’s tax revenue has not been buoyant since the global economic crisis. The graph shows that when direct and indirect tax revenues are added up, the total has declined in terms of gross domestic product (GDP) since 2008-09. The low performance becomes clearer in table-I, which calculates the buoyancy of tax revenue, defined as the percentage of tax revenue change as a ratio of the percentage of change in GDP. Thus, it is a concept that adjusts for the decline (or increase) in GDP reflecting the crisis. It reports the buoyancies of various taxes in three segments: 2005-08 before the crisis, 2008-10 during the crisis, and 2010-11 post-crisis. What one observes is the decline in buoyancies of taxes during the crisis. The recovery thereafter reflects the low revenue base on which 2010-11 buoyancies are calculated.
The revenue setback has been officially explained in terms of the fiscal stimulus that was given during the crisis. It is doubtful that all that tax reduction was needed; instead, the strong base on which tax revenue had been anchored during 2004-08 was lost. Table -II shows that the revenue foregone due to tax incentives in terms of GDP – an exercise that we initiated in 2005-06 – worsened in 2008-09 and that, in broad terms, revenue loss from this source has not receded over the years. During the current fiscal year, the first three quarters expended 90 per cent of the fiscal deficit budgeted for 2011-12, and the GDP forecast has been scaled back. Hence, the fiscal deficit-to-GDP ratio will be decidedly larger than the forecast, with a higher numerator and a lower denominator than projected. Certainly not a good account to take to rating agencies.
Last month I touched upon the expenditure side. Now let me consider what tax measures should be taken in the forthcoming Budget. These comprise short-run discretionary measures, forward steps in structural tax reform, and administrative reform.(Click here for table & graph)
Among the first, the excise duty or the central value-added tax (Cenvat) rate might be increased, reflecting the fact that its current base is just as far as the manufacturing stage while, under the forthcoming goods and services tax (GST), its base will be extended to include wholesale and retail value-added. If, under the GST, goods and services have the same tax rate – as indeed they should – then today’s Cenvat rate should be set at a higher level than that of the service tax rate. The government can get a good amount of revenue from this measure.
A second discretionary measure could be a generalised accelerated depreciation – and not selective ones – that would provide a fillip to industry as a whole. This would have an immediate adverse revenue impact but, with industry rejuvenated, revenue could pick up a bit later. Beyond such overarching measures, the government should ideally refrain from using too many micro discretionary measures to minimise tax-generated distortions in production and distribution.
The Budget should highlight structural tax reform. The government should indicate a realistic road map for the GST. It should also be transparent in indicating how it has had to deviate from international GST norms in order to clinch an agreement with states. It should say that it has not yet decided on a negative services list, that there is no finalisation on whether goods and services tax rates would be equal (which is a necessity in a GST framework), that it is being obliged to keep petroleum products and alcoholic beverages out of the GST base. What is happening on the inter-state goods and services tax (IGST) and the much-needed clearing house mechanism should be fully detailed and placed for public consultation, as every modernising finance ministry and tax administration do before introducing such major tax reforms.
Sometimes such consultation with the customer/client/stakeholder/taxpayer may take years. In India, only the central government, state governments and the bureaucracy consult; the role of stakeholders is minuscule. Even on as grave a matter as the direct taxes code, major changes have been proposed without taking even large taxpayers through a detailed consultative process. This should change if Indian administration is to become even slightly customer-friendly.
More From This Section
It is interesting that on February 14, 2012, the Press Information Bureau issued a bulletin titled “Government to provide citizen-centric governance in order to improve taxpayer services and redressal of public finances”, citing the finance minister. Its coverage includes better taxpayer services, expansion of centralised processing of returns, and curbing black money. This is a welcome gesture and the tax departments have indeed initiated some customer-friendly measures, though the ministry and departments should test themselves by participating in a benchmarking exercise that compares them with Australia, South Africa and the UK, whose comparative results are already available.
There is space for only an additional point: the revival of large taxpayer units (LTUs), which were introduced with great effort in 2006 but now are by and large dormant. It is time to make them obligatory, as in the 50-plus countries across the globe and 20-plus in Asia that have them. The Budget should show firmness in taking this step. LTUs help large taxpayers come to one window to pay all central taxes and, at the same time, the two tax departments can receive and exchange useful data and crucial information between themselves, leading to a win-win outcome.
Many other administrative reforms have to follow, in championing technical analysis for formulating tax administration policy, structuring the organisation of the departments along functional lines that emphasise professional specialisation rather than geographical divisions, and combining the departments while making such a body autonomous. Some of these are achievable in the medium term, but such intentions might be put on the table for discussion reflecting international practice.
There is no space here to elaborate on these reforms but they are to be found in the just-released Tax Shastra: Administration Reform in India, UK and Brazil (Business Standard Publishing, New Delhi). The real need is to make Indian tax administration comparable to modern tax administrations across the world, of which there are some in emerging economies such as Brazil, Chile, Korea, even Rwanda. It is time for India to run as fast as its bureaucracy can, in a leap to modernism.
The writer is director and chief executive of the Indian Council for Research on International Economic Relations .
All opinions are exclusively his own