The Hindu Business Line : Tax, to ensure equity across regions<br> Wealth is mainly in industry with an urban bias

Tax collections have been rising over the last few years, raising the tax-GDP ratio from 8.8 per cent in 2002-2003 to 10 per cent in 2004-05, and to 10.6 per cent in 2005-06. This, along with containment of expenditure, resulted in lowering the gross fiscal deficit-GDP ratio to 5 per cent in 2003-04; this figure is expected to be around 4 per cent in 2005-06.

The positive performance of tax collections and control on expenditure so far has to be a continuous focus of the Government. The Government presents its Budget every year and pledges to raise tax revenues and reduce deficits with a forecast of high GDP growth. The UPA Government's efforts have resulted in continued buoyancy in tax collections on account of higher receipts from corporation tax, income-tax, Custom duties and service tax.

In the first eight months of 2005-06, the revenue collection would have been still higher but for sluggish growth in excise collections in spite of an impressive increase in manufacturing output.

An important feature of fiscal performance is that revenue expenditure exceeded the estimates for April-November 2005 on account of Plan expenditure culminating in high gross fiscal deficit of Rs 1,12,949 crore in April-November 2005, against Rs 7,07,17 crore in the previous period.

Augmenting revenues

Since the Government has fixed a fiscal target of 4 per cent to be achieved by revenue-augmenting measures, additional tax revenue will have to be brought in without compromising the incentives for further investment, optimisation of national economic expansion and willingness to work.

Why should we not fix hard targets, for instance, for agriculture income-tax? Though politically it is a hard nut to crack, we may think of taxing at least big farmers with cash crops. On an average, if 2 per cent agriculture income-tax had been collected, there would have been an additional Rs 6,000 crore tax revenue, given the GDP from agriculture in 2004-05 was Rs 2,96,073 crore.

Service tax is being levied on a selective basis. The services sector generated domestic product of Rs 16,38,511 crore in 2004-05 and provided service tax revenue of Rs 14,150 crore, or 0.86 per cent of the income from services. If the ensuing Budget can double this ratio to 1.72 per cent, service tax receipts will rise to Rs 28,182 crore, forecasting the same output as last year.

The Budget should extend service tax to services till now not covered.

Ones that slip away

An efficient taxation system has to be vigilant to the growth of unreported income as well as wealth. A significant segment of tax-payers in the high-income bracket is avoiding income-tax by manipulating the calculation and presentation of tax returns to the Income-Tax Department. There are many wealthy taxpayers, who engage in unlawful activities to earn large income, which is hidden from taxation. Such incomes later surge in the form of real estate, service firms, factories and huge quantities of gold.

Such wealth should be subjected to high wealth-tax. There are many social workers cum politicians whose wealth has exploded to billons of rupees over the last 25-30 years; the amounts amassed having no correspondence with their declared incomes. The government has failed to catch the wealth of such tax-avoiders, though it finds it easy to tax salary-earners, retired persons and honest tax-payers with small incomes.

Tightening the belt

The Government has been sending a number of goodwill and political delegations to foreign countries. These trips can be curtailed. If we can check the expenditure of MPs and ministers on telephone, medicines, electricity, and bungalows, we could garner about Rs 1000 crore. The Budget can also increase revenue by imposing higher excise duty on breweries, cigarette, tobacco of high quality and soft drinks.

Is this enough to revitalise every aspect of the economy? The expectations are that the Government will focus on infrastructure. No doubt, this is of paramount importance as it facilitates inflow of FDI and pushes exports. .

However, a big portion (say, 65 per cent) of the population may only be marginally benefited. It is an embarrassment that 65 per cent of the population subsists on 25 per cent of GDP. India ranks 131 out of 193 countries in the under-5 child mortality rate.

India, though, scores on the basis of macro-indicators. Primary school enrolment is 77 per cent, though only 60 per cent reach fifth standard. Poverty, unemployment, high birth rate due to illiteracy and poverty generate further inequality among 40-50 per cent of the households. This segment of India is asset-less, income-less, without medical infrastructure (even of low quality), stays in rural India and the slums of metro cities. If the Budget can deliver on its commitments, these marginalised people too can enjoy the fruits of democracy.

Revitalising rural India

The UPA Government has pursued such programmes as the National Employment Guarantee Scheme, Sarva Shiksha Abhiyan, national rural health mission and Bharat Nirman (rural infrastructure), which are the right measures to tackle the above problems. However, the Government needs dedicated ministers and executives, with accountability, credibility and honesty, to implement these programmes.

Finally, to make India really shine,we should have a still larger Budget with low deficit and a highly decentralised impact of development on the masses. India's capital and wealth is concentrated in industry and business with a distinct urban bias while its masses live in the villages.

Considering the size of the rural population, the poor state of power supply, the inadequate infrastructure and the overall backwardness in terms of education, healthcare and respectable living conditions, 60 per cent of budgetary resources should be devoted to the rural sector and, of this, 80 per cent should go to agriculture, excluding all allied activities. This is only possible if the corporate sector and the financial sector can take care of urban infrastructure. The government can take such budgetary steps that attract corporates to invest for better growth of the urban sector, thus ensuring equity.

(The author is a former Economic Adviser to SEBI.)