Taxing problems

With tax collections growing at 40 per cent in April-November this year, and the finance ministry selecting 60,000 persons for detailed scrutiny, as the Annual Information Returns (AIR) data received from various shops and establishments showed their spending did not tally with their income tax returns, it is apparent the government's drive for increasing tax collections is doing well. E-filing of returns is now possible, and there is also less talk of inverted duty structures each time the government lowers import duties.

But it would obviously be wrong to assume that all is well, since a large part of the buoyancy is likely to be related to the overall economic conditions. The fact that excise duties rose just 7 per cent shows some serious work needs to be done here. As the Kelkar FRBM task force said the sustained path to tax nirvana will depend on implementing structural changes like a combined Goods and Service Tax (GST), but implementing just the state-level VAT took years even after an empowered committee was set up, and this has not even been done yet for GST. In any case, the finance ministry needs to abolish Central Sales Tax and include more items in the VAT list before it can move on this. It is equally true that if the government continues to introduce new taxes, reduction in import duties is certain to give rise to loud protests. A Ficci paper estimates that indirect taxes add up to between 30 and 40 per cent of a product's price even today. Thanks to FBT, dividend distribution tax, surcharge, education cess and so on, the corporate tax burden is over 40 per cent despite the government's claim that it is 30 per cent. Perhaps what is needed is for the finance ministry to do a comprehensive calculation of the tax burden on industry and benchmark this globally.

The other issue relates to tax administration and the plethora of exemptions. In the case of customs, for instance, there are about 110 general exemptions, each of which is then sub-divided into various letter combinations and roman numerals. One of the exemptions, for example, had 431 individual sub-exemptions under it last year and this is now up to 458 this year. Since each exemption requires fulfilling various detailed criterion, it is simply impossible to expect the system to get cleaned up or simplified till these are eliminated. Hinges, metal locks and the back of photo frames can, for instance, be imported duty-free by a manufacturer of handicrafts if these are being exported provided that the value of the imports doesn't "exceed 3 per cent of the FOB value of handicrafts exported during the preceding financial year", and the exporter produced a certificate of the description and value of the exports from the export promotion council. And for all the talk of the taxman's arbitrary powers of coercion reducing, it's important to keep in mind that over 38 per cent of the direct tax demands made by the taxman between 1996-97 and 2004-05 were dismissed in appeal or through settlement. There are then the indirect tax cases like ITC where the government lost the case in the Supreme Court, but changed the law and got the company to pay up part of the amount. Apart from his usual provisions on tax rate changes, the finance minister needs to seriously concentrate on administrative changes in the coming Budget.