The Budget this time will be taxing

With fiscal deficit worsening, expenditure rising and election compulsions nagging, Finance Minister Pranab Mukherjee is left with only one approach to the Union Budget for the next fiscal, say experts — raising taxes.

In the last three years, while government revenues have declined, allocation to non-plan expenditure has risen.

And increasing mismatch between income and expenditure means the government has borrowed more and more.

Between 2005-06 and 2010-11, tax revenues have risen at a compounded annual growth rate of 13%, while non-plan expenditure has shot up 30% and government borrowings by an alarming 32%. Meaning, borrowings and non-plan expenditure have nearly trebled in the last six fiscals.

With tax revenues at just 10% of GDP compared with 13.3% in Sri Lanka and 15.2% in Thailand, Soumya Kanti Ghosh, director of economic affairs at Ficci, said it’s time for bold and ambitious moves to increase tax revenues.

That’s the challenge, agrees Indranil Pan, chief economist, Kotak Mahindra Bank.

“There are a lot of expenditures that the government can’t do much about. But the service tax negative list is likely to be introduced in the Budget, which will provide a Rs20,000 crore fillip to revenue.

“The second step is that it might try to introduce a component of the Direct Taxes Code. The whole code can’t be rolled out because many amendments are yet to pass muster,” Pan said.
The third step, according to him, could be enabling policies that kickstart investments.

“My opinion is that MNREGA has largely run its course. The government could use that money to provide infrastructure development in the agriculture sector,” Pan said.

Pratik Jain, partner, KPMG, said the government will look at increasing the tax base rather than the tax net.

Last year around 130 items were brought under the tax net. This exercise is seen being repeated.

B Prasanna, chief economist at ICICI Securities Primary Dealership, said all the government has to do is raise taxes and cut subsidies.

“The only expenditure that can be cut is the subsidies. I don’t think much can be done about food and fertiliser subsidies, but petroleum subsidies can be cut, especially the diesel part,” he said.

But Tapas kumar Sen, professor at National Insitute of Public Finance Policy, believes petroleum subsidy is unlikely to be reduced. “On the other hand, fertiliser subsidy may not be hiked by much,” he said.

“The government cannot take any tough measures on the taxation side in the backdrop of a slowing economy. It will probably be rethinking about the entitlement programmes such as the Food Security Bill, MNREGA and right to education,” Sen said.

The refrain is that to control expenditure, it’s imperative to put a lid on fresh hike in allocations or at worst give token hikes to populist programmes.