The Hindu Business Line : Budget: What could have been done differently

A bigger public investment in infrastructure and social services would have made a greater impact on the economy than the across the board cut in the Cenvat rates.

T. C. A. Ramanujam

Here is a true story in the aftermath of the Budget of 2008. The family of a maid servant was not able to celebrate the marriage of their daughter because the jewels were pledged. The announcement of the bank loan waiver in the Budget sent shockwaves in the family. The family had small land holding in Dindigul near Madurai. It has gone to the Bank in Dindigul to redeem the jewels pledged for Rs 50,000 and celebrate the marriage of the daughter.

But there is another family of a Vedic Pandit. He borrowed Rs 50,000 from the bank for the higher education of his daughters. He will get no waiver because he has no land.

The Government could have extended the benefit of waiver to all the people below the poverty line. Economists may cavil that the waiver is a one-time measure which will not lift the agriculturists from their inherited poverty. There are enough critiques to show that the waiver scheme does not address the central problem of agricultural credit and rural indebtedness. The high-level Radhakrishna Committee no doubt recommended a loan waiver but it also called for an integrated set of measures to tackle the deepening agrarian crisis. Waiver was suggested only for identified districts with extreme distress.

The present scheme does not tackle the problem of stifling loans from rural money-lenders who account for more than 50 per cent of the rural indebtedness. The small farmers who are the beneficiaries of the waiver normally do not default in repayment. The waiver will benefit 40 million farmers in rural India.

People in extreme poverty work on small, rain-fed farms, growing staple grains partly for their own consumption. The International Development Enterprise (IDE) helps farmers gain access to the irrigation, fertiliser and markets. This is what Paul Polak, the founder of IDE shows in his latest and engaging new book: ‘Out of poverty: What works when traditional approaches fail’.

Outlays and Outcomes

The Finance Minister has doled out large sums of money for various welfare schemes. Last year, he had pointed out that outlays and outcomes are not the same. The Economist bemoans, “The Government subsidies fail to reach the poor, its schools fail to teach them and its rural clinics fail to treat them”.

The forecast of a Budget deficit of 3.1 per cent for the current fiscal year and 2.5 per cent in the next, does appear low.

Taking the deficits of the States and the cost of fertiliser and fuel subsidy, the deficit is likely to be 6.6 per cent of the GDP. India is in the worst fiscal shape among the big emerging markets (Economist, March 8, 2008).

And yet, there is a big throw away by way of doubling the tax slabs and tax exemptions. Major changes have been effected in tax rates. The tax saving for individuals will range from Rs 4,100 to Rs 50,000 a year for the 32 million income tax assesses.

The Economic and Political Weekly finds little justification for such a restructuring of income tax slabs.

It points out that on a conservative estimate, this can mean an annual throw away of Rs 30,000 crore of revenue at an average of Rs 10,000 for the 32 million taxpayers, a figure far larger than the one time farm loan waiver of Rs 60,000 crore. And yet, the Finance Minster has budgeted for a 22 per cent growth in income tax collections next year.

Tax Policy and Exemptions

The Finance Minister has been repeatedly stressing the fact that though corporate taxes stand at 33.3 per cent, the effective tax rate is only 20.5 per cent because of exemptions given under the various schemes like the SEZ, STP, EPZ etc.,

The Budget papers show that the ratio of net tax exemptions to GDP has gone up from 5.1 per cent to 5.9 per cent during the last four years. Taxes foregone equal half the tax revenue. It is no consolation that tax exemptions cost 7.5 per cent of the GDP in the US. India is not the US. We have to care for our downtrodden brethren.

The share of exemptions on income tax doubled to 12 per cent of gross tax expenditure and it is 17 per cent in respect of corporate tax exemptions. The largest component of revenue foregone is customs duty exemption at 44 per cent. Excise duty exemptions have gone up to 26 per cent of total expenditure. This is attributed to the geographical tax holidays which distort the system. The effective corporate tax rate for the public sector stood at 23.35 per cent against 19.5 per cent for the private sector. There is much to cheer about even in this exemption Raj. For the first time, direct taxes have exceeded 50 per cent of the total tax revenues. The income tax department has still a long way to go in the matter of improving tax efficiency. The National Institute of Public Finance and Policy in a recent paper showed that compliance rates have not gone up in spite of lower tax rates.

There are non filers of returns in large numbers. Tax arrears have grown from Rs 22,928 crore in 1995-96 and Rs 98,612 crore in 2005-06. The impact of tax audit is not as significant as it should be.

Economists have pointed out that a far bigger public investment in infrastructure and social services, power, rural roads, health and education would have made a greater impact on the economy than the across the board cut in the Cenvat rates.

The new tax

True to pattern, the Finance Minister has introduced the new Commercial Transactions Tax on future trading in commodities. Like the STT for stock traders, the CTT is also a turnover tax and it is not value added.

The Forward Markets Commission has decried the CTT. Trading in Commodities Exchanges is only 4 years old and is still in the formative stage. Barely a score of commodities are allowed to be traded on these exchanges. Rice, wheat and pulses are still on the banned list.

Nothing would have been lost if the Government had waited for the report of the Abhijit Sen committee which is looking into the impact of futures trading on inflation in food prices. The CTT is expected to fetch about Rs 700 crore per year. The introduction can probably be deferred for one more year. As Sir Winston Churchill pointed out, there is no such thing as a good tax.

Finally, how come there is not a whisper about the new integrated Direct Tax Code which is set for introduction in Parliament?

Obviously, it suffers the same fate as that of the Draft Income Tax Bill prepared 10 years ago by the Working Group set up by the Finance Minster.

(The author is a former Chief Commissioner of Income Tax.)