If Less Could Be More

TO most corporates, businessmen or salary earners, the Union Budget translates into one big worry: do I pay more tax or not? This year, with the finance minister himself hinting at tax cuts, hopes are up. Add to that the various committees working on rationalising direct taxes and savings incentives, and one might almost conclude that a lenient tax system is round the corner.

Almost. A Government which already pays about half of what it earns in interest has few options for raising resources. It can hardly borrow more, nor can it make its operations profitable overnight. So it can only try to raise more money from taxes. But being a coalition government, it must do so without raising the nominal tax rate or imposing new taxes.

Sound impossible? Consider these numbers. The share of tax revenue in GDP declined progressively from 16.38 per cent in 1990- 91 to 15.26 per cent in 1995- 96. Of which, income- tax collection accounts for 2 per cent of the non- agricultural GDP . So India is faced with a doubleedged crisis of low tax-GDP ratio and a low tax base. Secondly, liberalisation made increased reliance on direct taxes (personal and corporate income tax) almost a fait accompli. With excise reforms and gradual lowering of import tariff, the share of indirect taxes in total receipts went down from 86 per cent to 80 per cent in the ’90s.

Says Raja Chelliah, chairman of the tax reform committee that submitted its path-breaking report in ’93: "Direct taxes should ideally be 40 per cent of total revenues, instead of the current 29 per cent. The remedy is to get more out of those who pay unjustifiably less. If you raise the number of taxpayers from 10 million to 22 million, you can afford to reduce the tax rates." Adds V. U. Eradi, former member of the Central Board of Direct Taxes and member of the direct tax committee and the savings group: "Correct assessment of existing earnings/ profits alone can raise the tax revenue fourfold."

Right now, there are three suggestions before the Government to ensure better payment. The first is monitoring expenditure behaviour. For instance, says Eradi, if one buys a car or an expensive refrigerator, the revenue department should have the right and be able to question the source of income that allows such purchases. Another option is to monitor and collect information on people beyond a minimum standard of living. For instance, a person owning a house (or paying high rent), a car and two telephones and paying only Rs 10,000 tax a year would be an automatic candidate for an inquiry. While Chelliah is against such drastic measures, some kind of presumptive taxation, especially for the unorganised sector and professionals, despite the failure of Manmohan Singh’s one- time Rs 1,400 tax, has many champions in the Government.

The second is to plug all tax exemptions and loopholes, except for those that promote savings. Says Chelliah: "Perquisites like leave travel or house allowance should be taxed. But the biggest opposition comes from government employees." The private sector, too, will hardly welcome the move. But more than individuals, who account for 85 per cent of the tax paid, tax breaks play havoc with the tax liability of corporates, the direct result of which was the minimum alternate tax ( MAT ) on book profits introduced in the last Budget.

Says Partha Shome, director, National Institute of Public Finance and Policy, and chairman, savings group: "All these stupid exemptions like depreciation, export, backward area, SSI should go out of the window. " Experts criticise tax breaks on two grounds:it destroys horizontal equity, or equal treatment of equals. If corporates are allowed to pay no tax, individuals use that as a moral defence against evasion. It also encourages abuse— tax relief to export income has been used more for hawala transactions than by genuine exporters. While many differ on the efficacy of MAT (

see box ), all agree that it’s a good interim measure to raise revenues (about 0.1 per cent of GDP ). As a result, the Government is unlikely to scrap MAT .

The third way is to stiffen penalties for evasion and under- reporting. Says Eradi: "The current fine of paying three times the liability is too little and too inadequate. Nothing short of public humiliation, like a jail term, can put fear into evaders. Considering that only about a fifth of total earnings are declared, there’s a need for the public to realise that the penalty is swift and severe."

BUT all this is possible only if the revenue department has enough data and the right technology. Says Chelliah: "Even the  Department of Company Affairs and the RBI have data on only a handful of Indian companies." While Eradi feels an emphasis on investigation and search- and- seizure should be adequate, it’s also true that the department faces a gigantic task in securing new information and making it available on tap on a central computer system.

The committee on direct tax rationalisation and simplification has suggested a lower nominal rate of 35- 40 per cent, fewer slabs, raising the maximum tax rate floor from the current Rs 1.2 lakh, ending double taxation of dividends, some presumptive taxes and tightening corporate taxes while abolishing surcharge. Finance Minister P. Chidambaram is believed to have agreed to these. While low tax rates are advocated as it encourages compliance, in India it can only erode the already low tax base and depress revenues. In most developed countries, anybody who’s not on dole pays some income tax. Even the World Bank concedes that "strong revenue measures can boost the tax-GDP ratio by two percentage points by 2001 AD". But high rates are incongruous with India’s low per capita income. Ultimately, the best way to get more tax is to raise income.