Tax Base Must Be Widened By Limiting Exemptions
(Former director, NIPFP)
Two hectic years after he took a long leave from the International Monetary Fund (IMF) to steward the National Institute of Public Finance and Policy (NIPFP), the wheel has come full circle for professor-turned-practitioner Parthasarathi Partho Shome. But as Shome prepares to return to the IMF as advisor to fiscal affairs chief Vito Tanzi, he can reflect with some pride on his accomplishments as NIPFP director. Shomes stint with the NIPFP, which ended on May 31, saw the institute emerge as the countrys premier think-tank. The institute also won accolades for spearheading several of the new initiatives, especially under direct taxes, undertaken by the government. In an exclusive two-hour interview with Anil Padmanabhan prior to his departure, Shome dwelt on the institutes contribution, his views on the direction of Indias reforms and his own future plans. Excerpts:
On NIPFPs contribution:
The contributions have been at the central, state and local level. Within the central level we have catered to the Planning Commission and the Union finance ministry. And, within the latter the two broad areas of contribution have been policy suggestions towards direct taxes and indirect taxes. Immediately after I came we started work on tax reform strategies, typically in the realm of Modvat administration. Another area is customs administration. The basic objective being to track down methods of higher revenue productivity and better administration.
In the income tax area, the initial work was on presumptive taxation. We have sought to emphasise that we prefer production-based, not consumption-based presumption. Another area of work was on the tax deduction at source (TDS). The idea was to stem the revenue leakages in the system. What we have said is that computerisation is very slow and without that you cannot have TDS. We are also involved in studying a possible recast of the present regime of fiscal sops, specifically, savings incentives.
Coming to the Planning Commission, we were part of the working group on tax policy for the Ninth Plan. The thrust of the report was that you can still be revenue productive by increasing your tax-to-GDP ratio by abut 3 per cent of GDP over the next plan.
At the state level, we have worked very closely on harmonisation of the value-added tax. Now matters are fairly advanced. Perhaps a meeting of the Chief Ministers will be convened very soon to discuss issues related to all this, on which the NIPFP has laboured.
At the local government level we were the secretariat for the various state governments in the compilation of the State Finance Commission reports which deal with mobilisation of resources both at the municipal and panchayat level. Other than these, we have pushed ahead in health, environment, small scale industry and many other areas.
On revenue targets for 97-98:
They are not really ambitious. In fact, an exercise done by Surjit Bhalla for the savings committee report shows that with a slight improvement in compliance, and given expectations on the rate of inflation, we should be able to meet the targets. If the government is able to sustain the present trend in expansion in the number of tax payers then I dont see any reason why the government cant meet the direct tax targets for the year. But the will has to be there.
On the tax reforms agenda:
The objective should be to widen the tax base by streamlining exemptions and by expanding the universe of tax payers. In my view, almost all exemptions should be withdrawn. There should also be a concerted attempt to expand the base for service tax as this sector is one of the fastest expanding segments of GDP.
Next, we should now rapidly move to a system of value-added taxation which must be harmonised with the states.
Third, property taxation is a major source of embarrassment. I think this idea of rateable value and non-tax experts trying to give opinions on what should be the basis of the tax simply doesnt make sense. There has to be sensible formulation of the rules and laws so that the property tax base can reflect truly the market value.
The experience of most of the countries that undertook tax reforms is that the tax revenue increased by about 2-4 per cent of gross domestic product (GDP). In our country it has decreased by 1 per cent of GDP.
On the minimum alternate tax:
I believe that MAT is essential as it is both efficient and equitous. MAT says that you should pay a tax of two per cent on gross assets rather than book profits. In the normal course the assumption is that you pay tax at the prevailing rate, we will assume 40 per cent, out of your profits. It means that under MAT you are making 40 per cent tax equivalent to two per cent of your gross assets. This implies a five per cent return on assets. What the government is then telling you is that if you cant ensure this return then divert the capital to some other business. Now this subsumes that there will be an exit policy. This should be the long run strategy so that the country can ensure that it is getting at least a return of 5 per cent on its capital. I believe that using book profits as the base is a poor idea because profits can be manipulated, while the same cant be said about gross assets. Hence my belief is that MAT is efficient.
It is also equitous because you cannot have a situation where companies using the countrys infrastructure and generating billions of rupees of profits do not pay taxes. Whereas you have smaller companies using much lesser infrastructure, generating much lesser profits and ending up paying much more taxes.
On the fiscal reforms agenda:
The most important thing that we should be looking at is the burden of our public debt and the interest cost that underlies it. I think it is wrong to merely say that our public debt is two-thirds of GDP. The criterion instead should be as a percentage of non-subsistence GDP. That is because if you want to amortise your public debt it cannot be done from the entire GDP as you have to subsist. And for a poor country, non-subsistence GDP is very small. Clearly then our burden is very high, probably the highest in the world. Coming to the tax and expenditure side, I believe you have to increase the tax-to-GDP ratio and make up for the loss we incurred in the transitory period in the 1990s. And with regard to expenditure, the agenda should be to streamline the existing items. Here I dont even know what to say. When are we going to bite the bullet and admit that the government cannot manage its functioning and its expenditure policy in the way it is running today?
On his experiences with NIPFP:
I have pushed NIPFP in various directions and frankly I have never worked so hard in my life. I have enjoyed the work fully. People who matter have listened. But change is very slow to come in India. It is very difficult for a new generation with new ideas to break through in many walks of life as there are vested interests in older generations. Many of whom have no new ideas. In terms of my personal agenda I have succeeded in submitting various ideas. It will be worthwhile to sit back and see whether what we have proposed is going anywhere.
On his future plans:
I shall focus on the world again. A lot on Latin America. I guess the effect of knowing Spanish. One can always come back here for a longer period. I believe we are in a transition at the end of which this phenomenon of foreigners and Indians going back and forth from here will become common.