Policy

Pranab bets big on growth to fill the coffers

Harish Damodaran K.R. Srivats New Delhi | Updated on February 28, 2011

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With revenue buoyancy returning, the Finance Minister, Mr Pranab Mukherjee, seems to be betting on an acceleration of the current growth momentum, while targeting an ambitious 18.5 per cent increase in gross tax collections for 2011-12.

The downturn from late-2008 through much of 2009 had taken a heavy toll on the Centre's gross tax revenues, which fell to 9.5 per cent of gross domestic product (GDP) in 2009-10, from the peak 11.9 per cent achieved in 2007-08. Within this, indirect taxes ? more so, excise and customs ? bore the brunt, declining even in absolute terms.

But the current fiscal has seen the tax-GDP ratio recover to 10 per cent, with a further increase to 10.4 per cent projected in 2011-12.

The rebound has been especially pronounced in indirect taxes, where the revised estimates (RE) for 2010-11 have turned out higher than the budgeted levels for all the three main heads. Customs collections alone have overshot their Budget estimate by Rs 16,800 crore.

Buoyancy in indirect tax revenues

The Finance Minister expects the buoyancy in indirect tax revenues to continue in 2011-12 as well, which is apparently predicated on sustained industrial growth and import demand (perhaps aided by high global prices of oil and other commodities).

Moreover, Mr Mukherjee appears to be bullish on corporate profits too ? if the hefty Rs 63,613 crore (21.5 per cent) budgeted jump in revenues from this source (over RE) are any indication.

A notable feature of Mr Mukherjee's latest Budget ? and also the current fiscal's ? is its increased reliance on garnering additional revenues from indirect rather than direct taxes. That marks a partial reversal of the overall post-reform trend of a steady increase in the contribution of direct taxes from less than a fifth in 1990-91 to almost 59 per cent in 2009-10. In 2011-12, this share is budgeted at 56.3 per cent.

The Finance Minister reckons his direct tax proposals for 2011-12 to yield a net revenue loss of Rs 11,500 crore, whereas those on excise, customs and service tax are estimated to raise an additional Rs 11,300 crore in revenues.

Economists generally favour direct taxes: Taxing individuals and corporates rather than production and trade are said to lead to a less stifling of economic activity. Also, whereas taxes on goods are paid by the rich and poor alike, taxes on income and corporate profits are viewed as more egalitarian.

Besides seeking to enhance the share of direct taxes, the efforts by policymakers in recent times have also been to widen the base of taxation by including services.

Till 1994-95, services did not generate a single pie of revenue, despite accounting for some 55 per cent of the country's GDP. For the ensuing fiscal, service tax collections are budgeted at Rs 82,000 crore.

Published on February 28, 2011

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