Recent government data on tax collections paint a generally flattering picture of the economy and the tax collection machinery in so far as direct taxes are concerned. During the first nine months of the current fiscal, personal income-tax collections rose by 50 per cent and corporate tax revenues by 39.84 per cent as compared to the same period last year. If, as expected, the trend continues, collections from income and corporate taxes will comfortably exceed Rs. 267,400 crore and may even touch Rs. 300,000 crore. The principal factor behind the sustained tax buoyancy is no doubt the strong economic growth. An average annual GDP growth of 9 per cent over the remaining years of the Eleventh Plan (2007-12) seems plausible. The Plan assumes such a rate. For the current year, practically all forecasts place the growth rate around 9 per cent. If that comes about, the economy will be seen as consistently growing at 9 per cent over fairly long periods. The other reason for the healthy tax collections has been the vastly improved collection machinery, which includes a wider application of information technology and enlarged tax net. Do the record income and corporate tax collections suggest a reduction in tax rates? There are many who attribute the current buoyancy to reductions in the highest marginal rates of personal taxes by P. Chidambaram in one of his earlier tenures that were continued by his successors. Today the highest marginal rate for personal income-tax and the corporation tax are both 30 per cent. These are substantially in line with what obtain in many other countries. However, while retaining the highest rate at 30 per cent, the Government has sought to mop up revenue through other devices that push up the tax burden. Thus, for income-tax there is a surcharge of 10 per cent ( high incomes individuals) and an educational cess of 3 per cent. Corporates have also to reckon with the dividend distribution tax and the fringe benefit tax. A few of these tax proposals were meant to be temporary but have continued. There is a strong case for ‘rationalising’ the tax rates and making the structure simple and easy to comprehend and administer. But a reduction in the basic tax rates requires strong justification and not just because of the belief that lower rates will lead to higher collections. This also assumes that multitude exemptions are withdrawn and the tax payer actually pays the prescribed rate. There are good reasons why the Finance Minister should not reduce the basic rates. While everything points to a continuing strong economic performance, a slowdown, prompted by external factors, cannot be ruled out. Even a slight slowdown will reduce the quantum of tax collections.
Lag in indirect
taxes
Second, while the point regarding record tax yields
being a function of economic growth is well taken, it is surprising that
indirect taxes, especially excise, have been disappointing and yielded much
less even in a good year. The expectation is that customs and service taxes
will make up for the shortfall in excise revenues. A more detailed analysis is
required to find out why indirect axes have lagged behind direct taxes. Three,
that direct taxes are yielding more than indirect taxes is no doubt a good
sign. Direct taxes, graded as they are in India, are more progressive. But slow
growth of collections under excise duties is a matter of serious concern. Last
week, the Prime Minister’s Economic Advisory Council headed by C. Rangarajan,
had suggested cuts in excise duties on a range of consumer durables. The
suggestion, forming part of budget-eve recommendations, ought to be viewed in
its proper perspective. It is by no means a single point recommendation to
reduce indirect taxes. The Finance Minister has said that the (budgetary)
target tax/GDP ratio of 11.8 per cent will be exceeded. But then the budget had
neither anticipated the record direct tax collections nor perhaps the slow
growth in excise revenues. Besides, is a target of 11.8 per cent unambitious?
Four, the number of direct tax payers in India is still small and the number
assessed for surcharge (taxable income Rs. 10 lakh and over) is miniscule. The
majority of those who file returns have incomes of Rs. 2 lakh and less.
Naturally salary earners suffering TDS at the workplace cannot escape the net
and it is this feeling that only ‘honest’ tax payers bear the brunt gives
considerable weight to the argument that tax rates should be reduced and
simplified. However, extending the tax coverage is a separate matter engaging
the Government’s attention. Salaried tax payers like other citizens will
benefit if more people are brought into the tax net. Five, a focus on
government expenditure is always on during the run up to the budget. The
important point is that while direct tax collections are so impressive, it is
easy to hide inefficiencies in government spending. – www.thehindu.com