…..but can’t live on past laurels

Nothing succeeds like success. A proverb, expressing the idea that success breeds further success.

This is something that Manmohan Singh and his partymen would do well to remind themselves and also point out to citizenry and all those critics of economic reforms.

Singh’s seminal contribution to tax reforms can be gauged from the total transformation in Centre’s revenue collection pattern since 1991.

The rapid strides made in the quantum of collections since 1991 should be the showpiece of India’s economic reforms. Tax reforms have been the biggest game changer, although much less acknowledged.

Thanks to the tax reforms unleashed since 1991, the Central Government’s tax revenues have grown by 20 times in the last two decades.

Tax revenues have grown from Rs 57,576 crore in 1990-91 to about Rs 11 lakh crore (estimated) in 2012-13.

Of course, one may like to point out that it was adversity of a balance of payment crisis that brought out the best in Indian policymakers and the Government.

Nevertheless, India’s tax reforms and its beneficial outcomes in terms of massive increase in revenue collections is something to be proud about.

Of course, one may argue that India’s tax reforms efforts — which opened on a dramatic note in the initial years post 1991 like a James Bond movie’s opening scene — lost its pace after 2005.

After the introduction of value added tax in 2004, India has had no big achievement in tax reform to talk about.

Attempts to introduce a goods and services tax has made little progress although five years have lapsed since the announcement to introduce this tax, which is considered as India’s biggest tax reform till date.

So what trick did Indian tax policymakers do to transform the Centre’s finances post 2001?

There was a conscious effort in all through the post reforms era to shift the tax policy focus from indirect taxes to direct taxes. Taxation of earnings of individuals and corporates got more importance than production and trade.

This shift did pay rich dividends. In 1990-91, less than a fifth of the Centre’s gross tax revenues came from direct taxes.

Now, direct taxes account for over 50 per cent of the Centre’s gross tax revenues.

In fact, 2006-07 was the first year when corporate tax emerged the biggest taxation source for the Centre, comfortably exceeding the excise collections for that year. Corporate tax has since then been the largest source of tax revenue for the Centre.

Direct tax collections had grown at a scorching pace since the mid-1990s, thanks to the Government's policy to persist with stable and moderate tax rates. Direct tax revenues have grown 15 times in the last 15 years.

TAX POLICY VS TAX ADMINISTRATION

It is only in the 2012-13 Budget that the Government again tried to tilt the balance in favour of indirect taxes for mopping up additional revenues.

While tax policy and legislative action has been the focus of Indian policymakers, there is still lot to be achieved on the tax administration front, feel tax experts.

It’s time extra attention is given for tax administration. For an emerging economy like India, tax authorities lack maturity and skills in handling transfer pricing issues.

Many multinationals are smarting from the aggressive stance of tax authorities on share valuation and transfer pricing adjustments.

The real problem is that there is no accountability on the tax officer who raises the demands, which are sometimes based on incomes falling under the realm of fiction.

On one side, India is looking for large inflows of foreign money to support its growth needs. On the other hand, it tends to impose several conditions on the money that is flowing into the country, rue foreign investors.

A right balance is required, especially when attracting foreign direct investments is a priority.

Needless to say that Income Tax Department has made rapid strides on the technology front. It has used information technology to good extent, but more could be done. One of the big achievements of tax policy has been the use of tax deduction at source route to expand coverage and increase direct tax collections.

Nearly 40-50 per cent of the country’s income-tax revenues are collected through the TDS route, which is an achievement in itself.

The Income Tax Department has rightly focused energies on expanding TDS network by setting up more such dedicated directorates across the country.

TAX BASE STILL A WEAK LINK

India has notwithstanding the achievements on the tax collection front made little progress on widening the tax base. Noted fiscal expert Raja Chelliah had in early nineties stressed the need to widen the tax base and bring more assesses to the tax fold.

But very little has been achieved on this front. India continues to have only 3-4 crore assesses on the income tax side, many of whom are salaried class individuals.

If there is one area where the tax department can make life easy for the common man, it is in area of compliance.

As of today, the aam admi and corporate biggies like the Tatas have the same level of compliance requirements to grapple with.

Small units NEED EXTRA CARE

Small and medium enterprises are not given the extra care and attention that they deserve.

Other countries have gone the extra mile in having dedicated provisions in their income-tax laws to provide impetus to their growth. There is not much to brag about in the front as far as the Indian tax code is concerned.

The Centre is looking to collect direct taxes of Rs 5.70 lakh crore this fiscal, reflecting a 15 per cent rise over actual collections last year. On the indirect taxes front, the Centre had set a target of Rs 5.05 lakh crore. Both are difficult to achieve given the current economic conditions in India and abroad. Indications are that the revised estimates will be short by Rs 30,000-40,000 crore.

TAX EQUITY

Of course, one may argue that tax policies have only made the rich even richer and the poor even poorer.

The middle class - a large vote bank - continues to languish complaining about price rise and neo-liberal policies.

(This article was published on February 27, 2013)
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