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Tuesday, March 31, 2020

Several measures to simplify tax structure, but no magic wands

Let’s not forget that one of the successes of the government, since 2014, has been containment of inflation, dramatically stated in Economic Survey using thaalis.

Written by Bibek Debroy | Updated: February 2, 2020 11:36:13 am
Union Finance Minister Nirmala Sitharaman addressing the press after delivering her Budget speech on Saturday. (PTI)

Finance Minister quoted from Kalidasa’s Raghuvamsham. (She also quoted others, but this shloka (number 18 from Sarga 1) caught my attention.) She quoted in Sanskrit, and gave the translation. Ignoring the Sanskrit, her translation was, “Surya, the Sun, collects vapour from little drops of water. So does the King. They give back copiously. They collect only for people’s well-being.”

As most people know, Raghuvamsham is about Raghu’s lineage, one into which Rama was born. This particular shloka is about Rama’s ancestor, the famous King Dilipa. The translation is perfectly accurate, except that the word bhuti can also be translated as prosperity or wealth, not just well-being. Translated as wealth, it meshes perfectly with Economic Survey’s theme. The Sanskrit also has the word bali, which means taxes. The king collects taxes, which at that time, was one-sixth, roughly 16.7%. Coincidentally, until GST brought down tax revenue, Union and State-level taxes together amounted to around the same share of GDP, 16%. The preceding shloka (not quoted) compares Dilipa to a charioteer, with neither Dilipa, nor the subjects (wheels of the chariot) deviating from the accepted path. Union Budget is one instrument in a government’s policies and, as the FM pointed out in her speech, the accepted path is one of structural reform and inclusive growth. That was the path during 2014-19 and continues under the second Narendra Modi government. The accepted path is one of reducing the malign influence of government (improving ease of doing business, ease of living) and enhancing effectiveness of benign hand of government (DBT, sanitation/water, energy, credit, digital inclusion, affordable housing, social security, health).

Under both heads, there are bits in the Budget that feed into the broad thrust and their import will only become manifest gradually — encouraging state governments to implement model agricultural laws, 100 water-stressed districts, incentives for solar, balanced use of fertilisers, agri-warehousing and cold storage, village storage, cold supply chains, Krishi Udaan, a crop/district matching, negotiable warehousing receipts integrated with e-NAM, viability gap funding for hospitals in PPP mode, apprenticeship embedded degrees/diplomas, internship with local bodies, Ind-SAT, attaching medical colleges to district hospitals in PPP mode, National Infrastructure Pipeline, National Logistics Policy, solar capacity along rail tracks, corporatisation of a sea-port, removal of criminal liability in legislation, National Recruitment Agency, mechanism for recruitment to tribunals, strengthening Contracts Act, National Policy on Statistics, off-loading government equity in IDBI, opening government securities for non-resident investments, hiking limits for FPI investments in corporate bonds, off-loading government equity in LIC.

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All these (and there are a few more) feature in Part A of the Budget speech and are incremental to reforms already being undertaken. Yes, they will be a function of how they are implemented, and yes, implementation often depends on state governments. Anyone who expected Big Bang policy announcements through the Union Budget had unrealistic expectations. Except in the rare instance of the 1989-1991 balance of payments crisis, there never has been Big Bang. It has always been incrementally chipping away in Steady State. Many issues are state subjects. Did one expect the FM to do something about gun licences in Delhi, highlighted eloquently by the Survey? The Budget should stick to its knitting Union government receipts and expenditure.

Notice, in all this, there has been no deviation from the goal of fiscal consolidation. That’s the reason targeted fiscal deficit/GDP ratio is projected at 3.5% in 2020-21. It logically follows there has been no dramatic increase in expenditure as a result of these items mentioned in Part A. Any substantial revamp of public expenditure (such as Central Sector and Centrally Sponsored Schemes) has to wait for final recommendations of the 15th Finance Commission. While there have been arguments for counter-cyclical fiscal policy when there is a growth slowdown, what it entails is never clearly spelt out. Even if expenditure is not compressed during a growth slowdown, that amounts to a widening of deficit ratios. If fiscal caution is thrown to the winds, this has consequences, sometimes borne by succeeding FMs. Let’s not forget one of the successes of the government, since 2014, has been containment of inflation, dramatically stated in Economic Survey using thaalis. The counter-cyclical fiscal policy arguments essentially amount to fiscal concessions for specific sectors, or across-the-board reductions in taxation. Before moving on to taxes, the disinvestment target of Rs 210,000 crore may seem to be excessive. However, given the time-line of identified enterprises lined up for disinvestment/privatization, that figure is doable.

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GST is the purview of the GST Council. Note that when GST was introduced, it was expected to replace all existing indirect taxes from a revenue point of view too. That is, the average revenue neutral GST rate was expected to be 16%, perhaps a bit more. In contrast, the last computed average GST rate is 11.6%. Stated differently, there has been a fiscal stimulus through lower indirect tax rates. On direct taxes, corporate tax rates have already been reduced (22% and 15%), with an element of voluntary choice. Either one opts for lower rates and gives up exemptions, or one opts for higher rates with exemptions. Most people would like low rates, spliced with exemptions, thus enriching CAs and lawyers. That doesn’t make tax administration simple, nor does it reduce litigation. Government also doesn’t possess resources to deliver expected physical and social infrastructure (collective goods in nature) or welfare schemes (individual in nature). Following the mode adopted in case of corporate taxes, for personal income taxation too, Union Budget has introduced an element of choice (with some exemptions removed across the board). Admittedly, along this route of choice, there are too many slabs. That’s probably been determined by some calculation of revenue foregone. As growth rates improve and tax revenue stabilises, the number of slabs will no doubt be reduced.

In passing, there are several measures (both on direct and indirect) on simplifying tax administration. Yes, India went through a growth slowdown and Economic Survey expects real GDP growth to be between 6 and 6.5% in 2020-21. (Budget expects nominal growth of 10%.) If one expected a magic wand Budget would provide to jack growth up to 9%, one was being unrealistic.

The author is Chairman, Economic Advisory Council to the Prime Minister

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