The Hindu Business Line : A taxing prescription

THE REPORT OF the Task Force headed by Dr Vijay Kelkar, Advisor to the Finance Minister, on the implementation of Fiscal Responsibility and Budgetary Management (FRBM) Act, substantially reiterates the points made by another Task Force, interestingly enough headed by Dr Kelkar himself, nearly two years ago. Only the context is different. If earlier reforms were proposed to bring the tax code in alignment with the best international practices, now it is to ensure that the fiscal and revenue deficit targets spelt out by the new FRBM Act are met.

If the latest report breaks any new ground at all it is vis-à-vis the suggestion for a concurrent but independent jurisdiction by both the Centre and the States of a unified tax on goods and services. The concept of a unified tax at the Central level on goods and services is expected to be in place this fiscal on, with the Budget proposal of a set off of input taxes on both goods and services against those on the output. The new State Value Added Tax, that has been under discussion for some time now too, provides for such an arrangement. The only difference is that there is no provision for a set-off of service taxes against the State level VAT on goods. The bait that is being offered to the States by the Kelkar Task Force is that in return for getting the right to levy a tax on services, they should submit themselves to the standard rates of tax fixed by the Centre and follow procedures of tax administration set by it. Therein lies the rub. The proposal may well bring in additional revenues both for the Centre and the States. But it is a moot point if the States would so readily surrender the right to set tax rates or alter them. The power to tax carries the potential for private rent in the hands of those who can exercise it. That alone, if not the larger issue of State autonomy in fiscal matters, could derail it.

But a larger point needs to be made as well. In principle there can be few objections to the idea of fewer and modest rates of taxation or that they should be spread across a vast universe of tax-paying population. Equally, few would cavil at the thought that the nation's tax law should be structured simply and easy to administer, devoid of all kinds of concessions and exemptions. But a democratic polity and a coalition of disparate parties, each with its own priorities and development agenda and sound principles of tax administration seem mutually conflicting. Even if by some miracle the finance minister of the day manages to create such a structure, it is only a matter of time before concessions and incentives, and high rates of taxation to compensate for the sops, creep into the system.

An expert committee has the luxury of looking at aspects of tax policy from the lofty perch of fiscal principles. But not the Finance Minister. He has a job on hand in trying to balance the conflicting interests of different sections even if he is committed to the larger goal of a rational tax regime. Given the experience, it is difficult to be sanguine about the prospects of the latest set of recommendations making it to the tax code and remaining there.