Stifling taxes can hurt the economy

It is disconcerting that the Budget should ramp up revenue collection from surcharge and cess, despite their being objectionable on a number of counts. Ironically enough, the ‘direct taxes code’, which is all about streamlining rates and doing way with complicated clauses which only incentivise evasion, is supposed to be out anytime soon. Even so, the amount budgeted to be raised through surcharge and health and education cess on the direct taxes side (corporate and personal income tax), and through levies on petrol and diesel amount to over ₹3 lakh crore, out of about a total projected tax revenue of ₹16.5 lakh crore for 2019-20. This is against a mop up of ₹2.8 lakh crore out of ₹14.8 lakh crore in 2018-19, as per the revised estimates. Since the actual revenue realisations as per the Controller General of Accounts in 2018-19 were considerably lower, it would appear that the rather ambitious revenue estimates for the current year are based on surcharge and cess realisations, besides big ticket disinvestment. Levying surcharge and cess has increasingly become a means to deny States of their due share in the Central revenues — perhaps more so after the Fourteenth Finance Commission increased the share of the States in central taxes from 32 per cent to 42 per cent. It does not help the cause of ‘cooperative federalism’ that the transfers from the IGST kitty have not proceeded apace. At this rate, disagreements could manifest themselves at the GST Council over the duration of the GST compensation mechanism.

But what is really baffling is the targeting of the so-called higher income groups — going against the time-tested liberal wisdom of keeping tax rates reasonable but ruling out exemptions, as the best way to increase revenues. It is also worth wondering whether it is a good idea to exempt incomes below ₹5 lakh from paying tax, which amounts to narrowing the tax base amidst efforts on the indirect taxes side to do quite the opposite. While trying to spur consumption, it must also be realised that paying taxes is also about being a stakeholder in public services. While the government needs to ramp up its revenues to meet its varied commitments, the way to go is to keep the rates moderate, weed out exemptions and deliver on governance so that the cynicism of the taxpayer who experiences poor service delivery day in and day out is addressed. It is hard to argue that cesses for specific ends such as health, education and infrastructure are essential for improved outcomes.

The direct taxes code should streamline rates, leaving little to the caprices of the government of the day. A tax buoyancy of just about one has been the norm. This can be raised once the compact between the State and the citizen undergoes a change — and not by the taxman looming large over businesses and individuals.

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