The Hindu Business Line : Flush of funds

The Government must be singing in the shower as it watches its coffers filling up quickly. The data for April to October 2006 show a more than 35 per cent rise in direct tax collections at Rs 91,374 crore. Euphoric officials in North Block now expect the Budget target for such revenues to be exceeded by the end of the fiscal. This is indeed a justified optimism because the year's budgeted target had already factored in an increase of 28 per cent over the previous year's collections, a forecast based undoubtedly on the uptrend in direct tax revenues over the past few years.

What is particularly heartening is that both personal and corporate tax collections have been impressive, at 25 per cent and 45 per cent respectively in this quarter. Anyone familiar with the history of tax collections would know that this is a great leap forward in fiscal management because it suggests greater accountability of incomes and wealth than has ever been the case before. While unaccounted money still greases parts of the economy, the tax figures bespeak a movement towards global standards of compliance by firms and individuals. It would be tempting to suggest that higher direct tax collections are the result of growth alone; after all India has had a GDP growth of around 7 per cent on average for the past five years, a period that coincides with increasing revenues for the government. But growth in itself does not encourage tax compliance; simplified procedures, and lower tax rates do. Over the years tax procedures have been eased, albeit protractedly. For instance, although electronic filing of returns by corporates was introduced some time ago, the Income-Tax Department has been flexible in certain key requirements that would have encouraged more companies to take the e-filing route.

Arguably, the most important reason for the record returns is the lower tax rates. In 1997, in his first stint as Finance Minister, Mr P. Chidambaram reduced income-tax rates to around 30 per cent; although over the years surcharges were added, that rate pushed India into one of the lower taxed economies after decades of being the most punitively taxed countries in the world. Given the lagged effects of that change, the government is now reaping its fruits. The impact of tax inflows on the revenue deficit is unclear at this point; but if the gap has to narrow it behoves the Government to re-think its own expenditures so as to use the current flow of revenues where best needed.