:: Paranjoy Guha Thakurta

Plug holes to stop tax leaks, raise revenue

By Paranjoy Guha Thakurta

July 26 : Nobody likes paying taxes, neither an individual nor a corporate body. Both seek ways in which to avoid paying taxes and some evade taxes, with or without the assistance of smart accountants and lawyers. The more brazen even justify their actions by arguing that their "hard-earned" money would otherwise have been blown up by corrupt netas and inefficient babus. Yet, most would agree in their sober moments that no society can do without levying taxes to raise funds for parks, gardens and schools where our children play and study, or for that matter, drinking water facilities, electricity, roads, hospitals and a host of public amenities.

At one level, India’s tax collection regime has improved over the years and become more progressive in character. At another level, the system remains riddled with loopholes and exemptions galore so that the government ends up giving away much more by way of concessions in comparison to what it collects. These have been documented in successive Union Budgets but received little media attention.

A look first at the positive side to the story. As finance minister Pranab Mukherjee pointed out in his Budget speech on July 6, the Central government’s tax to gross domestic product (GDP) ratio has risen impressively from a low of 9.2 per cent in 2003-04 to 11.5 per cent in 2008-09. What is noteworthy is that this "healthy growth in tax revenues is essentially attributable to growth in direct taxes" with the share of direct taxes in the Union government’s total tax collections rising from 41 per cent to 56 per cent in this period.

Direct taxes like personal income tax are progressive in the sense that the rich or those with the capacity to pay more are taxed more than the poor or the economically underprivileged. On the other hand, indirect taxes like excise and customs duties are regressive because these are loaded on to the prices paid by consumers, irrespective of her or his economic status. Thus, a match box which is taxed is priced the same irrespective of whether a tramp or a tycoon purchases it. For many decades, the bulk of the Indian government’s tax collections would come from indirect taxes, but, thankfully, this trend has changed and been reversed.

But the story does not end here. Barely three per cent of this nation of over a billion people pays personal income tax. Out of this already-minuscule proportion of the population, roughly two per cent (including the salaried sections) don’t have much of a choice since their taxes get deducted at source even before a cheque reaches their hands. For decades, many have argued that rich agriculturists and so-called gentlemen farmers should be taxed and that agricultural incomes should be clubbed with non-agricultural incomes for the purpose of levying income tax. Nothing has happened in this regard.

Call it lack of political will or blame it on high costs of collection, the fact is that the government seems most unwilling to tax the rich farmer or the agricultural incomes of the affluent. The other systemic drawback is that the government invariably drags its feet in simplifying the tax regime as it benefits an entire tribe of lawyers and accountants to have gaping loopholes in the rules and regulations. If the government could collect even a portion of the huge amounts of money that are blocked in litigation of various kinds, the fiscal deficit could have been substantially lowered.

Together with this year’s Budget papers, a separate 31-page "statement of revenue foregone" was circulated. This is the fourth year such a statement has been circulated, although in earlier years the statement used to be tucked inside the Receipts Budget document. This statement has laid out in considerable detail the special tax rates, exemptions, rebates, deferalls and credits that affect the level and distribution of different taxes. These tax "preferences" may be viewed as subsidy payments to preferred taxpayers, the document points out.

There is a plethora of tax concessions that have been put in place over the years. For instance, in the case of export promotion concessions alone, there are no less than 12 schemes currently in operation. These include the advance licence scheme, the tax breaks given to export oriented units and computer hardware and software technology parks, the export promotion capital goods scheme, the duty entitlement pass book scheme, the special economic zones scheme, duty free import authorisation scheme, duty free entitlement credit certificate, the "target plus" scheme, the Vishesh Krishi and Gram Udyog Yojana, the "served from India" scheme and the focus market scheme. In addition, there are input tax neutralisation or exemption schemes besides ad hoc exemption orders that are issued in "circumstances of an exceptional nature".

The conclusions drawn in the statement are pretty startling. The revenue foregone as a proportion of aggregate tax collection of customs duty rose from nearly 26 per cent in 2007-08 to over 37 per cent in 2008-09, implying a rise from Rs 1,53,593 crores to Rs 2,25,752 crores. The same tale is repeated in the case of corporate income tax, personal income tax, excise duty and export credit. In 2007-08, the total revenue foregone by the government was over 48 per cent of total taxes collected or an amount of Rs 2,85,052 crores and this proportion rose to a high of nearly 69 per cent in 2008-09 or a staggering figure of Rs 4,18,095 crores — against India’s GDP of Rs 53,21,753 crores that year (revised estimates made by the Central Statistical Organisation) — which works out to 5.4 per cent of the country’s GDP.

The conclusion that the ministry of finance draws is that the amount of revenue foregone continues to increase year after year. The trend is an increasing one in the case of corporate income tax as well as indirect taxes like excise and customs duties. "Therefore, it is necessary to reverse this trend to sustain the high tax buoyancy", the last sentence of the statement reads.

Will this take place in the coming years? Your guess could be as good as mine.

Paranjoy Guha Thakurta is an educator and commentator