The Hindu Business Line : Tax bail-out by India Inc

ON THE FACE of it, there is something to cheer about the Centre's gross tax revenues of Rs 252,162 crore in 2003-04. That these have exceeded the Budget Estimate for the first time since 1995-96 makes the achievement all the more creditable. However, a closer look reveals that the overshooting has entirely to do with corporation tax collections which, at Rs 63,882 crore, have surpassed the estimate by a whopping Rs 12,383 crore and even the earlier Revised Estimate of Rs 62,986 crore. On the other hand, collections from personal income tax (Rs 40,703 crore), excise (Rs 91,016 crore), customs (Rs 48,606 crore) and service tax (Rs 7,863 crore) have fallen short of the BE by Rs 3,367 crore, Rs 5,380 crore, Rs 744 crore and Rs 137 crore, respectively. Simply put, it is India Inc that has bailed out the Government.

The manufacturing sector's recovery, both in terms of output as well as price realisations, has not translated into significantly higher excise collections, just as the 19 per cent surge in imports (in rupee value) has translated into only an 8.4 per cent growth in Customs revenues over 2002-03. Clearly, the buoyancy in production values has been somewhat offset by cuts in indirect tax rates, including those effected in the last quarter. At the same time, the recovery in sales, in conjunction with soft interest rates, has helped boost corporate bottomlines and, in turn, deliver an unanticipated revenue bonanza more than compensating for the shortfall in excise and Customs collections. On balance, there is nothing particularly bad about the above trend. After all, as long as the economy is booming and this gets reflected in higher tax revenues, it does not really matter where the money is coming from.

But on a more serious note, greater reliance on taxation of incomes — of corporates or individuals — as against commodities is something that is to be welcomed. Commodity taxation has an in-built regressive character, as it is tantamount to penalising productive manufacturing and trading activity. This is not so with taxing incomes, which does not interfere with economic activity per se and, indeed, has a progressive `more-you-earn, more-you-pay' side to it. To that extent, the decline in the share of indirect taxes in the Centre's total tax revenue kitty — from over 78 per cent in 1990-91 to 69 per cent in 1995-96 and 58 per cent in the fiscal just ended — is a healthy development and, precisely for this reason, the emphasis on bringing down excise and Customs duties over the medium term should be persisted with.

The reduction in rates has to happen alongside a widening of the whole indirect tax base. That petroleum products contribute to roughly 42 per cent of the Centre's excise and more than a fifth of the Customs revenues is sufficient proof that this is not the case now. The time has come to do away with all area or sector-specific excise sops, which have only spawned perverse investment incentives and discouraged the setting up of large, viable capacities. Bringing services under the tax net has, no doubt, created a revenue source that did not exist till 1994-95, and now generates almost Rs 8,000 crore. But even here, there is scope for widening the ambit, considering that services account for over half of GDP.