Saturday, Dec 20, 2014

Will the new India please arise

The prime purpose of fiscal policy is to maximise revenue and minimise expenditure. The prime purpose of fiscal policy is to maximise revenue and minimise expenditure.
Written by Surjit S Bhalla | Posted: May 31, 2014 2:30 am

and minimising tax rates. Obviously, the minimum tax rate should not be zero. So what is to be done? New tax policy — zero dividend tax, all capital gains tax at 7.5 per cent (short-term, long-term, property), and zero securities transaction tax. One needs to do a complete rethink in order to achieve a Jupiter-style velocity into the new world. Did you know that the government does not publish or allow publication of data pertaining to income tax returns, which income group paid how much tax? These data were published, albeit in limited form, till a few years back. Until UPA 2 disallowed or prohibited the practice. Time to make such data freely available, so one can actually witness the fact that the rich have the highest compliance rate.

Personal income tax: A complete overhaul of the tax system with only two tax rates — 10 and 20 per cent. This will increase compliance and substantially increase revenue. Corporate tax: This should be restructured according to best practices in the world (which most emphatically rules out the US) and with two goals in mind — maximisation of revenue and global competitiveness. At present, Indian corporations are among the highest effective tax-rate payers in the world, where effective is defined as the ratio of taxes paid over income made. This effective tax rate is, at present, around 25 per cent; it should be closer to 18 per cent. Essentially, what needs to be done is a lowering of tax rates and an increase in efficiency of tax collection. An increase in tax compliance that will accompany lower tax rates will also mean substantially lower corruption.

Expenditure policy: Try surgery. The broad statistics on fiscal deficit are as follows (and it is surprising how many tax experts and policy economists and especially market economists are unaware of the empirical magnitudes of this “identity”). The consolidated Centre-plus-state fiscal deficit is around 8 per cent of GDP; 5 at the Centre and 3 in the states. Expenditure (state plus Centre) is around 30 per cent of the GDP. So revenue is 22 per cent, of which non-tax revenue is 4 per cent of GDP. Implementation of the GST should allow extra revenue of 1 to 2 per cent of GDP; a substantial reduction in welfare or in-the-name-of-the-poor subsidies to only 2 per cent of GDP will save another 2 percentage points. Linking the subsidies to cash transfers and Aadhaar will mean that the bottom third of the population will get nearly five times the money they presently receive via misguided Nehru-Gandhi socialist programmes like PDS
and MGNREGA.

A rationalisation of welfare expenditures will allow for substantial increases in expenditures on infrastructure and public health, especially on water and sanitation (including cleaning of the Ganga and other rivers). This will allow the Central fiscal deficit to be less than 3 per cent in two years, and less than 2 per cent in three. That is the nayi kahaani, and we have not even begun to talk about the positive continued…

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