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The job of the finance minister is the toughest in the Union Cabinet.
When Pranab Mukherjee unveils the full-fledged 2009-10 Budget in a few weeks from now, the peculiar concatenation of circumstances makes his predicament even more difficult. The economy is still mired in crises, despite the fiscal and monetary stimulus packages; the fiscal situation is dire, judging by the sheer magnitude of the revenue and fiscal deficits projected for the current year in the Interim Budget.
Any harsh tax proposals would be unwelcome from the point of industry and trade and indeed, from a larger perspective; yet, to leave a yawning chasm in the current account and take recourse to borrowings in a massive way may leave us fiscally more vulnerable.
Mukherjee must mobilise resources for restoring the fisc to health but can hardly do so in the current milieu of economic slowdown.
Indeed, it is too much to expect that the finance minister will muster courage even to restore the status quo ante in respect of central excise duty -- which was cut by 4 percentage points in December 2008 -- and in service tax -- which was pruned by 2 percentage points in February 2009.
One area of promise is to phase out the various tax incentives and exemptions, deductions and the like, which during 2007-08 meant a tax revenue foregone of over Rs 2,75,000 crore or as much as 48% of the total gross tax collections for that year.
In the current context of paucity of funds, if a beginning is made towards elimination of some of the tax concessions under various guises, the exchequer stands to gain enormously.
Of course, this move is bound to ruffle some feathers but it may hit two birds with one stone -- generally leaving the industry untouched while restoring a semblance of health to the fisc.
Over the years, tax-GDP ratio has tended to go up and now stands at around 12%; within this overall figure, there is also a rough parity between direct and indirect taxes of late, thanks to the conscious effort to improve the collection from direct taxes. Though tax revenue is a function of both tax rates and the tax base, in the Indian context, the reality is different.
Given the fact that there exists a plethora of special tax rates, exemptions, deductions and the like, tax mop-up is greatly impaired. The revenue impact is large and rising.
From an estimated Rs 2,06,700 crore, revenue foregone had risen to Rs 2,39,712 crore in the following year and further to Rs 2,78,644 crore in 2007-08.
The government has often stressed the need to step up the tax-GDP ratio.
But, by its policies of tax incentives and concessions, it stymies
this very effort. In one of the Budget documents, it has admitted that the tax mobilisation drive could be hurt by special tax rates, exemptions, deductions, rebates, deferrals and credit.In essence, they amount to a kind of subsidy payments to preferred taxpayers and their revenue impact was rather large.
The time is ripe for a rethink on this policy. Some of the incentives and exemptions have outlived their utility and need to be given a good bye. This is especially so in regard to direct taxes. This cannot be done at one go but the process must be initiated.
What better time than now, when the economy is in the doldrums and the fisc is in dire straits; when a harsh Budget is ruled out and a further deterioration in the fiscal health needs to be arrested.
