The Hindu Business Line : Budget 2004-05: Dipping into new resource streams

THE one person in whose shoes I would not like to be at this moment is the Finance Minister, Mr P. Chidambaram. Adroit and adept as he may be, Budget-making for the year 2004-05 is going to be very much like squaring the circle. Just mark the mutually contradictory exhortations of pressure groups flung at him from all sides: "Go for more taxation, squeeze the services sector harder," say the know-alls of Fitch, Moody's and Standard & Poor's. "Tax agricultural income and reduce other taxes and duties," says India Inc.

"Arrest and reverse the fiscal deficit of the Centre and States (including the sizeable holes in the finances of Public Sector Undertakings) approaching 12 per cent and cut subsidies," says the IMF. "Do not touch subsidies," say free lunch fanciers. "Raise interest on savings," says the Left. "Jack up spending on education, health-care and social sector!" "Pump prime the economy so it grows at a minimum of 8 per cent!"

Vision and design

Mr Chidambaram will need all his political savvy and financial acumen to accomplish what, to all intents and purposes, looks so manifestly like a "Mission Impossible".

Indeed, he must have by now given the finishing touches to the Budget and almost completed the process of shuffling figures under different heads and toting up the totals. All that remains, perhaps, is for him to shove the Budget into his customary box or bag (as preferred) and take it to the Lok Sabha on July 8. The best we can hope for is that it will be more than a patchwork of permutation and combination with amounts and percentages and that, running through them, will be a common thread of vision and design to maintain the tempo of development.

If experience is any guide, as he reads the Budget, the portions generating whoops of delight and joy or groans of protest and disappointment, as the case may be, will pertain mainly to what goes into, or is taken out of, the pockets of individual and corporate tax and duty payers.

The reactions to the Budget too will be similar: Some concession or tax reduction will be greeted with "very good, very good" and any new impost or tax raise will provoke shouts of "very bad, very bad".

The commentariat (this is a new vogue word connoting chair-borne chatterati and media wordsmiths) will latch on to figures here and there and let fly. The more enterprising and hard-working of them will spread the previous years' Budget sheets before them in order to enlighten the populace on what allocation went up or down in comparison. It will be hard to find among them more than a few who will be concerned with anything other than the changes in the direct and indirect taxes, the monetary dollops and lollypops for different sections of the narrow tax paying base of the population.

Blind spot

It is not that taxes and duties are without relevance. They are the Government's mainstay as sources of revenue.

They can, by their incidence, egg on or slow down economic activities in expected or unexpected directions. India is notorious as the least taxed country where only 4 per cent of the population pays taxes, and where the total tax revenues as a proportion of GDP has remained unchanged for more than 10 years, at around 15 per cent while it is 27.5 per cent for even a small country like South Korea and 30 per cent-plus for most others.

The percentage can be pushed up in India, not by reverting to the absurd situation that prevailed in Morarji Desai-Indira Gandhi days when individual taxation touched 98 per cent or more, but by bringing within the tax net sections so far under-taxed or not taxed at all.

Failure to widen the tax base (including within its definition levy of user charges also) is foremost among the blind spots of India's financial managment. The reason is that like weather, everybody talks about it, and yet there is a dearth of concrete suggestions in most writings other than roping in farm income and the earnings of the services segment of the economy. The National Council on Applied Economic Research (NCAER) has specifically suggested an 8 per cent tax on the transport sector (whose worth it estimates at Rs 1.6 lakh crore) to rake in an additional revenue Rs 12,800 crore. It also proposes a similar tax on goods transported by rail which could yield Rs 2,200 crore, totalling to a bonanza of Rs 15,000 crore.

Other than superficial tinkering with a half-hearted 1-by-6, and talking about doing away with exemptions and the like, the past Finance Ministers themselves have not been putting their full weight and authority in exploiting the available opportunities to the hilt. For instance, the Value Added Tax (VAT), which would have covered transactions at all levels, curbed evasion, enlarged the tax catchment and conduced to a uniform tax collection system throughout the nation is in the doldrums for want of political will to make the recalcitrant States fall in line. Also, enough effort has not been made to educate the public and the tax-payers on the merits of the system.

In a paper on additional resource mobilisation included in Fisc 2020 published by the Public Expenditure Round Table (PERT), Mr T. C. A. Ramanujam, the economic commentator, has come up with several innovative possibilities of casting the tax net wider. Some of the new sources waiting to be tapped are:

An exit tax, equivalent of two months' salary, (the fee usually charged by headhunters), to be paid by the employee or the firm at the time of grant of the visa for study, training or posting abroad, capable of yielding Rs 5,000 crore annually.

A flat tax of, say, one per cent, to be paid by overseas nationals on their income.

A share transaction tax garnered through TDS on every share transaction in bourses at 0.25 per cent for dealers and 0.1 per cent for individual investors, fetching Rs 5,000 crore per year.

A carbon tax on all fossil fuels.

A nominal 0.05 per cent Tobin tax on foreign exchange transactions across the border.

An international fuel aviation tax to mitigate the negative impact of aviation on sustainable development on the lines of thinking within the European Union.

To have only two categories of Indians — citizens and non-citizens — for tax purposes, and to levy tax on the worldwide income in the hands of the citizens as in the US, generating an annual additional revenue of Rs 2,500 crore.

Presumptive taxation

Some years ago, thinking beyond the dot, Mr Vasanth Sathe, a Congress stalwart and Minister at the time, had proposed an expenditure-based income-tax convincingly arguing that it would make for a hundredfold rise in the number of assesses, chiefly belonging to high-spending middle-class numbering at least 250 million and augment the coffers by Rs 2 lakh crore in direct tax.

The biggest advantage of such a tax is that it would be easily verifiable and computable. It would also correct the ridiculous position in which the direct tax payers form only 0.34 per cent of the population in India, compared to 85.36 per cent in Denmark, 85.16 per cent in Sweden, 81.31 per cent in Finland, and so on down the line to 52.58 per cent in the US, 46.39 per cent in France, 44.93 per cent in the UK and 39.29 per cent in Germany. The higher proceeds in direct taxes would enable the indirect levies to be halved across the board drastically bringing down the prices all round.

Presumptive taxation is in force under various names in France (forfait), Israel (takshiva), Bolivia (Musgrave formula), and its mutants are part of the financial architecture in Columbia, Mexico, the Philippines and Turkey, among several other countries. Tax expert Dr Raja Chelliah's view is: "Given the present structure of the economy, and the limitations of the administration, the principle of presumptive taxation merits serious consideration in the Indian context too."

The Finance Minister will be judged by the efforts he makes for resource mobilisation along new lines, so that he does not have to add to the burden on the present tax-payers. The need for such efforts has become imperative because of the ambitious goals for growth incorporated in the Common Minimum Programme (CMP) of the United Progressive Alliance (UPA). The proposed mighty push to investments in agriculture and physical and social infrastructure, and a ten-fold increase (from less than one per cent to nine per cent of the GDP) in spending on health and education are estimated to cost around Rs 5 lakh crore.

The scheme guaranteeing employment for one member of every poor household may by itself involve an outlay of Rs 1 lakh crore in the next five years.

Financial devastation

Mr Chidambaram surely understands that if, on the one side, all the grandiose commitments made in the CMP are to be kept, and if, on the other, all freebies are to continue pampering the freeloaders, something will give and the UPA itself will face the danger of collapse. Already, the employee unions have made a preposterous demand for setting up a Sixth Pay Commission, as if the financial devastation caused by the previous one is not enough.

The Finance Minister should nip in the bud such wild sorties into bankruptcy. He will also do well to dust up his own report of 1996 on subsidies and bring it up as a special item for discussion before the National Development Council.

He should not brush aside the recommendations of the Geethakrishnan Committee on reducing Government expenditure simply because it was appointed by the previous dispensation. "Heed good advice from whatever quarter it may come," said Tiruvalluvar, of whom Mr Chidambaram is an ardent votary.

Finally, what really matters is not packing some facts and figures into a compilation called the Budget, but to meticulously follow up on what is done with the money in terms of the schemes and projects taken up for implementation.

Unfortunately, the effectiveness of public expenditure — getting the maximum bang for every buck — is the one area which Finance Ministers have not been addressing with sustained vigour. Let us hope Mr Chidambaram will be an exception!