The Hindu Business Line : Taxing indirectly

As North Block gets into stride for its forthcoming Budget less than three months away, one aspect of the fiscal it can look at with justifiable pride is the strong flow of direct tax revenues with a growth of 45 per cent over the year. So much so that policymakers can expect the Rs 2,67,490-crore Budget estimate for 2007-08 to be not just met but exceeded by a long way given the economy’s overdrive and a strong compliance ethos at work among corporate and individual tax-payers. It would also be no surprise if direct tax collections end up higher than those of indirect taxes. On the other hand, the sluggishness in the rise of indirect tax collections, specifically that of excise, does not square with the continuing buoyancy in the manufacturing sector and the economy as a whole, and the Finance Ministry would do well to take a hard look at this edifice.

On a surface view, both Central and State indirect tax revenues have appeared robust since 1995-96 even though their share in total tax collections has declined from 76 per cent to 63 per cent in 2007-08. For the States, indirect taxes have over the period constituted the bulk, almost 80 per cent of their revenues; for the Centre too they are substantial, and responsible for this dominance is not just high economic growth but the high incidence of indirect taxes. Estimates suggest that the entire range of domestic indirect taxes, Central and State, mark up the cost of Indian goods from computers to automotives by 25-30 per cent, in contrast to China’s 15 per cent. While Customs duties have come down to a peak rate of 10 per cent, domestic levies still average between 16 and 20 per cent. Thus Customs duties were subjected to uniform reductions while domestic duties have been cut on an ad hoc basis. Every Budget offers duty relief for specific sectors, creating uncertainty among producers even as the average high levels have a cascading effect on overall prices.

An ideal fiscal regime should leverage indirect taxes to reduce overall costs, not simply offer contingent relief, say on account of a rising rupee that affects demand. Cost considerations applied to Customs duties have had a salutary effect on the organised economy and demand but domestic taxes still keep costs high. The proposed Goods and Services Tax offers governments the chance not just to streamline the regime, but also to move the rates down. Revenue losses can be made up by the ample gains in direct taxes paid by companies and individuals profiting from the rapidly growing economy. Both the Centre and the States, cued into the growth story as they are, need to think alike on this score too.

Related Stories:
Excise revenue rises 14% in Oct
I-T collections up 40% in Apr-Oct, corporate tax revenues rise 45%
Direct tax collections may surpass indirect taxes this fiscal
Tax revenues of VAT States rise 23.41% in April-Jan