The Hindu Business Line : Get tax collections booming too

With little scope for meddling or further increasing tax rates, the Finance Minister should concentrate on reform of the collecting machinery. With the economy booming, there is no reason why the tax revenues should not be buoyant, says M. R. SIVARAMAN.

In the context of a booming Indian economy it will be useful to analyse whether tax revenues have shown concomitant growth.

The gross tax revenues of the Union Government over the last six years are given in the Table.

Basic arithmetic reveals that the tax revenues have grown at a compound rate of 12.7 per cent over six years. During these six years the Government has levied more taxes and also expanded manifold the Service Tax base. A National Calamity Fund Duty is levied on several products in addition to the excise duty. An education cess is levied at 2 per cent on all taxes.

The growth in service tax is noteworthy. From Rs 2,613 crore in 2000-01 it has risen to Rs 34,500 crore as estimated for the current financial year. If the revenue receipts are cleaned for revision of rates and addition to the tax base, then the growth in tax revenues may be less than the 12.7 per cent actually achieved in the last six years. This indicates that the tax buoyancy is not consistent with economic growth.

Function of two variables

Tax revenue is a function of two variables — the real rate of growth in GDP and inflation. The figures given in the Economic Survey 2005-06 indicate an average growth in real GDP of around 6 per cent for all these years. The inflation rate for the same period for all commodities is about 5 per cent. In other words, the tax revenues just about reflect the growth in GDP at market prices.

From a simplistic point of view there has been no visible impact on revenues of tax reforms and other administrative measures taken by the Revenue Department.

Detecting tax dodgers

A few weeks ago the Finance Minister had said that the Revenue Department has all the machinery in place to detect tax dodgers. If at all it is in place then it is obviously not being effectively used. It appears those who have not been paying taxes continue not to do. There is no other reason for tax revenues not to have risen dramatically with all the new levies and also accounting for the boom in the economy.

The Indian economy is notorious for its ability to generate black-money, a function of the high and deep levels of corruption at every level. Added to this is the plethora of export incentives and concessions. There is the general feeling the tax incidence has gone up considerably with the 12 per cent service tax being levied on every conceivable service.

On average, a person pays around 28 per cent in commodity taxes on all excisable goods as this carries a VAT (value added tax) of about 12 per cent with the excise duty paid having a cascading effect on VAT. So whatever is spent on commodities, 28 per cent goes to the Unionand State governments. In addition, there is the element of service tax on ordinary services used by normal consumers.

This does not take into account the income-tax already paid. And yet the revenue realised is not commensurate with economic growth.

Scope for tightening

Does this indicate that black-money is also growing at the rate of economic growth? Clearly, there is scope for tightening the system. The areas of tax avoidance are exports, small-scale sector which is exempt from excise duties, diamond and jewellery business which accounts for nearly 4 per cent of GDP and yet pays hardly any tax to either the Union Government or the States, professionals who collect their fees in cash such as doctors and lawyers, real-estate developers and agents, and stock market operators who are exempt from capital gains tax.

There should be only one scheme that ensures whatever is exported is free of domestic taxes. It is easy to have a passbook for exporters who can import all inputs duty-free based on approved input-output norms. All import and export entries are made in the passbook. This can be verified periodically via a software to check whether there have been excess duty-free imports. A separate passbook can be issued for purchase of excisable goods for duty-free exports. The software can be designed to check the use of the materials purchased duty-free for exports. Bulk of the exports can be taken care of in this manner and all other schemes can be done away with. This was suggested to the Commerce Minister and was also supported by the then President of Federation of Indian Exporters' Organisation. But vested interests did not allow implementation.

Exemption from excise duties

Region-specific exemption from excise duties and exemptions from payment of excise duties in case of small-scale industries have more political justification than economic. All studies in this regard, including one done by the Finance Ministry, have established that such region-specific exemptions do not promote industrial growth but only shift investments temporarily unless the States provide the necessary infrastructure which make future investments attractive without tax sops.

There is no way to check the abuse of the system including that of invoices for claiming fraudulent CENVAT credit. It is better to make all of them pay and reimburse them at the close of the financial year. This can be arranged with a system of filing of returns and reimbursement of excise duty through electronic transfers without the intervention of an officer.

Curbing black-money generation

To check the generation of black-money, a complete administrative reorganisation of both the departments is immediately called for. At present the Central Board of Direct Taxes has no clue as to what tax it is collecting from different sectors except in the case of large taxpayers. For example, it does not know how many doctors, lawyers, jewellers, arc furnaces and the like are there in the country and how many of them pay taxes. This woeful lack of statistics is the bane of the CBDT and a boon for the holders of black-money as they escape detection with ease. So is the case with the Central Board of Excise and Customs as it does not know for sure what is being produced by small-scale units nor for that matter even by medium-scale units that do pay excise duty.

Need to file returns

All persons engaged in small-scale industries, and professionals such as lawyers, and doctors, regardless of their incomes must be required to have PAN numbers and also be asked to file their income-tax returns and report production details in the case of small units. All of them should be asked to choose their commission rates to which alone their returns should go electronically or otherwise. It would then be possible to know who is paying what and accurately pinpoint those who are avoiding or evading taxes by correlating the PAN number information with other data such as available on doctors from the medical colleges, lawyers from the bar councils and so on.

And unless the States address certain issues neither will there be a check on the generation of black-money nor will there be the required income elasticity in tax revenues:

Introduction of arm's length computerised registration of documents in all property transactions.

Survey of all urban properties every five years and levy property tax strictly on the basis of built-up area without any frills.

Collection of passenger fares tax and entertainment tax on the basis of capacity of busses and cinema halls.

Uniform levy of VAT

Introduction of HSN classification for a uniform levy of VAT to prevent hunting for tax havens. As in excise, every commercial and industrial unit must be required to register under VAT and submit simple returns so that governments can have a data base to check tax receipts against potential. Where and when a unit cannot file returns electronically by itself it should have the facility of easy access to a service facility run by the tax departments to help such small units to file returns.

Abolition of all sales tax incentives to industries so that they are attracted on the basis of administrative efficiencies and infrastructural facilities. A thorough overhaul of the administration at the district and lower levels to make them people friendly. As there is now little scope for meddling or further increasing tax rates the Finance Minister should concentrate on reform of the tax collecting machinery.

(The author is a former Revenue Secretary, Government of India.)