The Hindu Business Line : None can be wise and loyal, furious and neutral

WHEN in paragraph 137 of his 2005 Budget Speech, the Finance Minister came to `the issue of taxes on petroleum products' and announced reduction of customs duty on crude petroleum from 10 per cent to five, it was only the naïve who expected a reduction in the retail price of petrol and diesel. Even such delusions saw their denouement after the Finance Minister declared that `the proposed changes are revenue neutral' and so "there will be no increase in the retail prices of these products as a result of the changes in the duty structure".

However, about a week ago, there were disturbing reports that our Government gained almost Rs 3,000 crore as additional revenue from petrol and diesel, despite claims of revenue neutrality. As if to counter the same, the Petroleum Minister, Mr Mani Shankar Aiyar, remarked on Monday, after meeting the Finance Minister that he was more than convinced about about the Budget proposals being revenue neutral.

If you zero in on `revenue neutral' as the phrase to explore from scratch, you'd learn that such policies don't impact total revenue. Thus, when a Budget tweaks rates, hiking some and lowering others from a revenue neutral perspective, the net effect may not show on the bottom line, more like the compensating errors in a trial balance knocking one another off. For instance, a `feebate' is a revenue-neutral fiscal measure that increases taxes on some products and uses the revenues to provide incentives or rebates to other products, as www.econcept.info explains from an environmental angle.

RNR or revenue-neutral rate came in focus recently in the VAT context. RNR is the VAT rate at which tax revenue remains same despite giving credit of duty paid on inputs, according to http://dateyvs.com. On how RNR is lower than sales tax, here's a numerical example: "If today, sales tax rate is 15 per cent on wholesale price of Rs 100, under VAT system, tax will be collected at consumption stage i.e. on retail price of (say) Rs 125."

Yet, a quick punching of the calculator will show that applying an RNR of 12.5 per cent — as decided for most of the commodities — yields a tax of Rs 15.63, which is more than the earlier Rs 15. Not all are happy; a communiqué from the planters' body laments that consumer price of tea has gone up because of RNR. Despite such skews, the new system attempts overall revenue neutrality, thoughStates may approach the Centre with demands to make good revenue loss, at the end of the year. An interesting `technical discussion' on RNR on www.forsyth.cc/tax/reval.pdf . defines RNR as: "The rate that is estimated to produce revenue for the next fiscal year equal to the revenue that would have been produced for the next fiscal year by the current tax rate if no reappraisal had occurred."

A recent Local Finance Bulletin on http://ncinfo.iog.unc.edu states that calculation and publication of revenue-neutral tax rate is a step toward `transparency in local government'.

For the economics-minded, there's a research paper titled Revenue-Neutral Tariff Reform: The Welfare Effects of Uniform Tariffs in 13 Developing Countries by Josefina Martinez on www.colorado.edu. According to the author "starting from an initial situation with differential tariff structure, a revenue-neutral trade reform aimed to tariff uniformity leads to welfare gains."

Other papers of relevance are Efficiency and distribution effects of a revenue-neutral income tax reform, by Burkhard Heer and Mark Trede; Should high-tax countries pursue revenue-neutral ecological tax reforms? by Thorsten Bayindir-Upmann and Matthias G. Raith; Revenue Neutral Deposit/Refund Systems by J.R. Mrozek.

Labelling a tax proposal `revenue neutral' may not help if the government sends conflicting messages through its actions. Bill Shein's December 2004 article titled `Revenue Neutral' is a Farce posted on www.reasongonemad.com says: "Last month our `revenue neutral' Congress cut college aid for one million low-income students and dumped nearly 2,00,000 poor children from state-based health insurance programs. But it somehow found $2 million to buy back the presidential yacht Sequoia for President Bush to enjoy." Here too, we don't see tangible reductions in Government expenditure.

Legitimate comparisons, because taxpayers aren't dumb. One may draw comfort from this interpretation on www.needlenose.com about Bush's reverse-Robin-Hood approach to tax reform: "If I steal your wallet, or clean out your bank account, that is a revenue-neutral exchange. The amount of money hasn't changed; the only difference is whose pocket it's in."

On http://taxprofessor.blogspot.com catch up with Bush-speak: "The — first of all, a principle would be revenue-neutral. If I'm going to — you know, if there was a need to raise taxes, I'd say, let's have a tax bill that raises taxes as opposed to let's simplify the tax code and sneak a tax increase on the people. It's just not my style. I don't believe we need to raise taxes. I've said that to the American people. And so the simplification would be the goal."

The blog adds that `revenue neutral' is a tricky exercise, "because legislators have made a fine art of manipulating the `window' periods that score how tax law changes affect the public treasury."

Macbeth asks, "Who can be wise, amazed, temperate and furious, loyal and neutral, in a moment?" and answers, "No man." Likewise, if one were to ask, "Who can be paying taxes and still be non-aligned about revenue neutral proposals?" the reply would be, "No man."

ZeroBase@TheHindu.co.in

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