The Hindu Business Line : Tax bounty

With every official agency estimating that the current fiscal will close with nine per cent growth, it is no surprise that direct tax collections have surpassed previous records. The latest figures for the April 2006-February 2007 period show the growth in direct tax collections at 39.5 per cent — almost double the budgeted estimate of 19 per cent for the fiscal. Should the momentum continue, the year should end for North Block on a happy note indeed. Among the segments, corporate tax revenues played a prominent part, once again predictably, considering the record growth in sales and profits across sectors with a 45 per cent jump in collections over the previous period; personal income-tax, including revenues from fringe benefit tax, securities transaction tax and banking transaction tax, too set a record, with 39 per cent growth over the corresponding earlier period. Once again, the data provide proof, if it were needed, that low tax rates combined with transparent and simplified procedures make for honest taxpayers. In the light of the current expectations of duty cuts the overall collections provide some important lessons.

Lower taxes do not mean less revenues; direct tax collections have risen even as indirect tax revenues have fallen but the overall kitty, as measured by the gross tax-GDP ratio, has benefited from the systematic reductions in indirect and direct tax cuts. Currently, the ratio stands at 11.2 per cent compared to 8.2 per cent in 2001-02. In 1990-01 indirect taxes contributed 8.2 per cent of the gross revenues of the Centre, and direct taxes just 1.2 per cent. Today, both direct and indirect taxes share the honours, at around five per cent each. Indirect tax reductions boosted growth; expanding prosperity provided the means and simplified procedures with lower rates the motive for wider compliance. Under ideal conditions, the Finance Minister should read these as signs for a further reduction in excise and Customs levies; with rising inflation the need for cost-cutting measures becomes even more essential.

But conditions in the indirect tax regime are not ideal. While lowering indirect taxes, the Centre must also ensure that the States and local bodies take steps to hasten the process of rationalising their levies so as to unify the fiscal regime across the country. Part of the reason for rising costs of inputs lies in the different levies and the uneven tax incentives States offer to attract investments. Such incentives lead to inefficient allocation of investments and thereby ramp up costs down the line. While pursuing the concept of common markets through free trade agreements with various countries in the region, the Government should adopt such fiscal measures as will ensure that India itself becomes a truly coherent single market.

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