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Agnikalam: 2015-16 Union Budget - the must and the must not

The plausibility of a second Salt Tax March



The Union Budget a few days hence is sailing on the high seas of expectations. It is being perceived as the last chance for the new government to demonstrate its capability to act on the ground for, its previous Budget posthumously acquired a label of being far too simplistic, needlessly adhering to unachievable goals set by the previous government. Thus it would not be too difficult for the forthcoming Budget to improve upon the last.

Yet, improvement is not what India is looking for. Bold, dynamic, growth orientation in taxation coupled with minutely targeted programmes for the truly vulnerable - shorn of undeserving subsidies in consumption and production that have given subsidies such a bad name - comprise every even minded person's expectation. This carries considerable challenges; yet this is the optimal moment, for people are ready for, and expect, cutting edge changes. If this opportunity is missed even in a non-election year, government will not recapture it..

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The expenditure side is where deep cuts are needed for, without it, the "tax terrorism" regime - that the ruling party itself had coined when it was in the opposition - would necessarily continue to be used and thus would get further entrenched under even its own government. That would be ironic indeed. It must be digested by the new policymakers that statements are believed only when well matched action follows; it is on the basis of those detailed policy corrections that business decisions are actually made. They must surely be made before the sunset of government's honeymoon with the productive sectors that elected it to represent them, appears on the horizon.

Once the government correctly perceives itself as having been elected to take action freely, it should be ready for going to war in correcting the morass of wrong economic policies that India is currently beset with. India is autarkic in its lack of interest in international policy experience, entrenched in its belief and conviction that 'we are different' than the rest of the world. In fact, even the smallest countries - take for example Andorra, nestled between France and Spain with 400 sq km of space, nonetheless with eleven municipalities - think likewise. The same could be said about India. But India is no different from the rest of the world in the fundamental economic principles that guide the well being or failure of an economy.

Research shows that vote bank politics erroneously thinks that false promises are better than promising truthful expected action. Voters will have more confidence in a government that is formed by those who did not make pre-election false promises and follows up fully with the limited promises - even the harsh choices - revealed before elections. This government should do the same before it reaches post-election fatigue. The debacle of the recent Delhi elections could otherwise get exacerbated elsewhere.

The government can bury tax terrorism by curtailing expenditure. First, this should comprise penalties and incarceration following declared monitoring and evaluation procedures for its various expenditure programmes as all self monitoring countries do. The processes should not take asymptotically infinite time as in India. Second, subsidies should be targeted only for the extremely vulnerable and not for urbanites. The argument that middle class life is becoming intolerable may be acceptable in an absolute sense though it sounds unconvincing in the relative context of India's overall extreme poverty. Government should design subsidies only for the absolute poor. Third, production incentives for any named sector should be abandoned other than narrowly and clearly defined infrastructure. It should be confined only to investment. This will be government's biggest test. Fourth, government should announce a review and revision of the calculation of revenue loss from tax incentives that has been presented in every Budget since 2006. The methodology needs urgent re-examination. Fifth, government should create an Office of Expenditure Monitoring and Evaluation (M&E) that would be accountable for tracking efficiency of, and leakage from, expenditure programmes. One admits that the Centre cannot do the job alone. This is after all a federal state. The Centre cannot control many large states. And leakage there as has been, and continues to be, revealed, is mind-boggling. A Truth Commission is called for to address this national crisis.

On the tax side, first, fixed point revenue targets should be buried. Second, the Chief Economic Adviser of the Ministry of Finance should be directed to develop a model of economic cycles with built-in taxability of different productive sectors as has been developed in other emerging and advanced economies. This is the CEA's acid test. The model's continuing outcomes will enable the Finance Minister to give the tax administration meaningful moving revenue targets over the economic cycle so that, third, tax payers are spared illogical, if not illegal, tax collection. Otherwise, a second Salt Tax March could not be ruled out reflecting the lurking anger in the productive sectors. Fourth, to assuage good taxpayers, the Minister should announce the concrete framework he intends to put in place to enable good taxpayers to comply voluntarily. He should indicate how, fifth, he intends to clamp down on corruption and, sixth, raise accountability for resolving disputes by tax officers, the sum total of which has led to out-of-the-graph indicators for India's tax disputes and difficulty in conducting business. The Prime Minister's best intentions would otherwise continue to remain sullied. It must be admitted that the recent announcement that the stock of disputes would be examined comprises a step in the right direction though the Budget should announce a menu of comparable sensible measures.

This much is surely reasonable to expect as a start for, the reality in its details is far worse for the daily life of the economic agent and the good taxpayer. Tax laws and rules continue to be introduced without discussion. Tax revenue dissipates through rampant expenditure leakages. Is there much wonder that the taxpayer base has remained at 3.5 crore over the last decade despite GDP's impressive growth, so unsuccessful it has been to convince potential taxpayers - the so-called non-filers - to enter the tax net. Time is short. True and deep action is awaited in the much anticipated Union Budget. Let the government reveal that it can take serious action by introducing strong and meaningful measures that the country is expecting it to take.

Shubh Kamanayen!

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First Published: Tue, February 17 2015. 21:50 IST