Chelliah Calls For Better Planned Tax Initiatives

The government cannot expect to see buoyancy in revenue when it has lowered tax rates, increased the number of exemptions, thereby reducing the tax base, even as tax administration continues to be lax, said Dr Raja J Chelliah, chairman of the Madras School of Economics, yesterday.

Flaying the middle-income groups and the business community for continuing to clamour for tax exemptions, Dr Chelliah said with low revenues, the government will be forced to resort to the earlier practice of higher tax rates, which will then be followed by VDIS-like schemes.

A key aspect of fiscal reform should be stability and well-planned tax initiatives, he said while addressing a conference on Long-Term Fiscal Policy a five-year framework organised by the Madras Chamber of Commerce and Industry here.

 

The government should come out with a revenue plan that will clearly outline the proposed tax reform programme and the revenue projections thereon, an expenditure plan that will not only specify the ratio of government expenditure to GDP but also the structure of the proposed expenditure.

As a result revenue and expenditure plans, the government would automatically move towards the targeted fiscal deficit. However, there has to be a fundamental change in the way a budget is conceived and presented, he said.

Finance ministers might consider it their prerogative to introduce changes in each budget, but such moves do not benefit the country in the long- or even medium-term, as most of the changes are ad hoc, Dr Chelliah said.

He said that even in the last budget presented by finance minister P Chidambaram, although the policies and changes made were in the right direction, their ad hoc nature does not bode well for the economy. Changes in tax rates or structure, if needed, should be planned, revealed and well-accepted before they are introduced.

He cited two cases of such ad hoc changes. The number of import duties has gone up since 1995 in the name of rationalisation of tax structure. Similarly, the United Front governments largesse to government staff much more than the already-generous recommendations of the Fifth Pay Commission are instances of unplanned, ad hoc government revenue and expenditure plans, he said.

He called for a tax system based on the European model under which India should have a well-planned tax programme that would clearly state the objectives and revenue projections thereon.

Dr Chelliah also proposed a change in the composition of central government expenditure where a drastic cut in administrative expenses would directed in sectors like education, health, roads and agriculture.