The Hindu Business Line : Budget 2004-05 — Some taxing issues ahead

Tax rates have often been linked to exemptions. When policy-makers decide to change an economy's behaviour, the tax code is usually the tool they use. Raising revenues to support government's direct expenditure programmes and operations in society is only the tip of the iceberg. Will it be a Budget with a `human face', asks T. C. A. Ramanujam.

THE new Government of Dr Manmohan Singh is lucky in a way. It inherits a healthy economy, whatever the political opponents of the NDA may publicly proclaim. The latest issue of The Economist of London notes a GDP growth of 10.4 per cent for India against Argentina's 11.3 per cent and China's 9.8 per cent.

Apart from China, South Korea and Taiwan, India has the largest foreign exchange reserves, at $113 billion. Consumer prices have been contained, the rise being only 3.5 per cent against China's 3.8 per cent. The falling interest rates have given a boost to the housing sector.

Tax rates

The Finance Minister, Dr P. Chidambaram, is the author of the boldest tax cuts in India's fiscal history. These basic rates have remained stable the past seven years. Corporate houses will be pleased to have a further reduction in rates.

They have the example of the US President, Mr George Bush, who deliberately cut tax rates and incurred the odium of being the first President to serve the interests of the rich.

Prof Joseph Stiglitz, Nobel Laureate and former chief economist of the World Bank, castigated Mr Bush's tax cuts as being "beyond the means of even the richest country of the world".

Mr George Akerloff, Economics Professor at the University of California, Berkeley, described it as "a form of looting" and called for active civil disobedience by the American public against the government. Dr Paul Krugman thought that Mr Bush's policies were a sure route to a "fiscal train-wreck".

More than 400 economists signed a public declaration in February 2003, warning against the tax cuts, which they said would only "worsen the long-term budget outlook, reduce the capacity of the government to finance social security and medicare benefits as well as schools, health, infrastructure, and basic research, (and) generate further inequalities in after-tax income". The world over, the trend is towards reducing tax rates, especially for corporates. A survey of corporate tax rates of 60 countries by KPMG International's Tax centre in the Netherlands explains the scenario graphically: "As new technologies make it easier to move business activities and capital around the globe, countries are under increasing pressure to maintain competitive tax regimes".

Developed countries have an average corporate income-tax rate of about 34.8 per cent; in the Asia-Pacific region it is 31.7 per cent. The countries of the European Union tax companies at 36 per cent. India's corporate tax rate at 35 per cent stands well in comparison with these countries. The only problem to be sorted out may be the differential tax rates for foreign and domestic companies. And, perhaps, the dividend distribution tax may have to go.

Chambers of commerce have been repeatedly drawing attention to the discrimination in tax rates based on forms of business organisation. This appears unavoidable and it exists in almost all countries.

Tax exemptions

The tax rates have often been linked to exemptions. When policy-makers decide to change an economy's or society's behaviour, the tax code is usually the tool they use.

Raising revenues to support government's direct expenditure programmes and operations in society is only the tip of the iceberg.

In the US tax system, tax breaks rather than direct expenditure account for one-fourth to one-third of the benefits and subsidies granted to the public.

There are tax breaks for home ownerships. Tax subsidy is given to provide energy independence and promote energy conservation.

Income-tax is considered a primary instrument for dealing with growth and recession and implementing macroeconomic policy.

Ronald Regan's tax cuts created the deficits of the 1980s in the US.

Mr Bill Clinton's 1993 tax increases were responsible for the elimination of the deficit by the late 1990s. Mr Bush's tax cuts recreated large deficits in the first years of the 21st Century.

If the exemptions in the tax codes are taken into account, the effective rates may not cross even 20 per cent in India. Whatever Mr Vijay Kelkar may say, the prospects of eliminating tax exemptions will always appear remote.

Whoever the Finance Minister, the corporate vested interests will see to it that the exemptions remain. It will be interesting to watch what the new government does in this regard.

It is likely that the direct tax collections of over Rs 1,04,600 crore in 2003-04 will provoke complacency in the powers that be. What has led to the record tax revenues should be attributed only to a deepening rather than widening of the tax base. As the Finance Minister who innovated the one-by-four scheme, it is hoped he will give thought to widening the tax base.

Voluntary Disclosure of Income Scheme

Is there any rule that if it is Mr Chidambaram as Finance Minister, there should inevitably be a Voluntary Disclosure of Income Scheme? The Common Minimum Programme announces that special schemes to unearth black money and assets will be introduced. There is a misconception that the VDIS of 1997 was a big success because it mobilised Rs 10,000 crore.

That scheme was designed to help tax evaders avoid paying even the 30 per cent tax. The Comptroller and Auditor General pointed out that VDIS 1997 helped dishonest tax payers pay tax at even 2 per cent by valuing gold and silver at rates prevailing prior to April 1, 1987.

The Government gave an assurance before the Supreme Court that VDIS 1997 would be the last of the schemes. The Finance Minister has announced that the amnesty need not necessarily be with regard to tax rates. Probably, the thinking is of black bonds.

It is well-known how the Bearer Bond schemes were misused. It is amazing that the Left should support introduction of tax amnesty schemes.

Privatisation

After the spectacular success of the NDA in mobilising funds of Rs 14,000 crore from disinvestment of PSUs, it is an anti-climax that the present regime plans to shun privatisation.

Dr Manmohan Singh thought of disinvestment in 1991-92 to raise resources for PSUs and to improve their management. He also approved at that time disinvestment up to 20 per cent equity to mutual funds/financial and investment institutions in the public sector.

The disinvestment proceeds, in his opinion, should be used to create a national fund for assistance to workers in the unorganised sector and to meet Voluntary Retirement Scheme needs. He also thought of special employment schemes in the backward areas. These are noble objectives and there is no reason why they should be <243>given up.

Ultimately, there is the "human face" to be reckoned with. How do we reconcile making industrial advances at lower rates to giant corporate houses from deposits from the old and the sick who get a return of 6 per cent?

Mr Jaswant Singh had conceded the injustice involved in the system of lowering interest rates, exposing the fixed-income groups and the pensioners to higher inflation with <243>lower incomes.

He had announced a scheme to introduce the Dada-Dadi bonds to take care of senior citizens. Will the present Government have similar sympathies? The Budget will show.