The Hindu Business Line : Centre's revenue performance: Need for sharper focus

AS THE Finance Minister, Mr P. Chidambaram, commences the final round of exercises for Budget 2005-06, a few creases may be appearing on his forehead as it might be difficult to reconcile to the grim fiscal performance of the first nine months of 2004-05.

Judged against the Budget Estimates for the financial year, revenue receipts as at end December 2004 stood at 60.9 per cent, total expenditure at 68.4 per cent and non-Plan expenditure at 73.9 per cent, with revenue deficit reaching 82.7 per cent. In comparison with the proportions of the Budget Estimate realised in the previous two years, the performance in 2004-05 suffers.

And, yet, the Finance Minister may have reason to console himself that in absolute terms, most indicators are better than in 2003-04 and 2002-03. Revenue receipts from tax and non-tax sources during the nine months are about Rs 17,950 crore more than what was realised in April-December 2003. But aggregate expenditure too is higher.

This, however, is only one side of the picture. For, the Finance Minister may yet have to satisfy himself if the July 2004 estimates presented to Parliament were realistic at all. The feedback he gets may vary. For instance, the Centre's gross tax revenue had fallen to Rs 1,87,060 crore in 2001-02 from Rs 1,88,603 crore in 2000-01 but subsequently improved to Rs 2,16,266 crore in 2002-03 and Rs 2,54,923 crore in 2003-04, representing increases of 15.6 per cent and 17.9 per cent respectively. Going back further, one sees that the Centre's gross tax revenue had more than doubled between 1995-96 and 2003-04, increasing from Rs 1,11,224 crore to Rs 2,54,923 crore. But the rub lies in the details of contribution by different taxes and duties. Most of the increase has been contributed by corporation tax and income-tax, which had registered more than double-digit growth in percentage.

The picture relating to indirect taxes — Customs and excise duty — is different, Between 1999-2000 and 2004-05, the contributions to gross tax revenue from corporate taxes increased from 17.9 per cent to 27.8 per cent, income-tax from 14.9 per cent to 16 per cent, and service tax from 1.2 per cent to 4.5 per cent while Customs duty fell from 28.2 per cent to 17.1 per cent and excise duty from 36.0 to 34.4 per cent.

To put it differently, as a percentage of GDP, the gross tax revenue fell from 9.4 per cent to 8.8 per cent between 1995-96 and 2002-03, while by the same yardstick, the share of the corporation tax increased from 1.4 per cent to 1.9 per cent, that of the income-tax from1.3 per cent to 1.5 per cent, and the service tax from 0.1 per cent to 0.3 per cent. However, the share of Customs duty fell from 3.0 per cent to 1.8 per cent, and that of excise duty from 3.4 per cent to 3.3 per cent. This is the area that should receive the Finance Minister's attention in the Budget. The import of raw materials and capital goods may have become cheaper and can make industry to be more competitive in the international market. Also, the lower Customs duties may have affected Indian manufactures in the domestic market.

The net tax revenue to the Centre, at 60.4 per cent of the Budget Estimates, is lower than the 64.5 per cent touched during the corresponding previous period. Those monitoring the Centre's finances may look askance at the reported collection of Rs 34,577 crore in December 2004.

The figure for November end was only Rs 1,06,669 crore — 45.6 per cent of the Budget. Could the urge to step up the revenue collections and reduce the revenue deficit explain in part the Union Government's recent decision to issue an ordinance to neutralise the decision of the Supreme Court in the long-pending case of excise dues from the ITC? The step may appear rather harsh but the compulsion faced by the Centre needs no elaboration.

The lower than expected level of revenue realisation has not only put pressure on the Centre's already delicate fiscal balance but may have also thrown the budgets of various States off balance. The tax devolution showed an increase of Rs 7,636 crore, from Rs 56,122 crore in 2002-03 to Rs 63,758 crore in the 2003-04 Budget. But, for 2004-05, the Budget projected a more than double level increase of Rs 16,443 crore.

This would have certainly made State governments pitch their estimates of revenue at a higher level and commit themselves to enhanced levels of expenditure. While the Finance Ministry has been operating a State Fiscal Reform Facility Fund, providing incentives for performance judged by single-point indicator of reduction in revenue deficit, instead of a multi-indicator performance target suggested by the Eleventh Finance Commission, it does appear ironic that the Finance Ministry has to share some part of the responsibility for the States slipping in their revenue estimates.

Mr Chidambaram had in the last Budget referred to himself as votary of tax reform and said he had decided against any reform in a piecemeal manner. He had declared that "seven months from now there will be another Budget and there will be an occasion to visit the subject of tax reform." He and his team should perhaps revisit the subject of tax reform with a sharp focus on the relative changes in the proportions contributed by direct and indirect taxes and duties to the Centre's revenues.

(The author is Vice-Chairman and Honorary Director, Indian Institute of Economics, Hyderabad.)

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