The Ordeal Begins For United Front Govt

The 1997-98 budget will be crucial in as much as it will show if the United Front government has the courage to keep its gross fiscal deficit (GFD) under control. The trend so far shows that political compulsions rather than economic rationale have overlaid the decision making. A couple of examples show this. The government has decided to go soft on subsidy. It is in no mood to raise prices of petroleum products. How it is going to account for the massive burden of Rs 15,500 crore on the oil pool account is really an enigma.

These populist decisions close the options and make the task of resource mobilisation that much harder.

 

Agriculture continues to be a sacred cow. No political party in power has the will to bring agricultural income under tax. That deprives the government of a good source of taxable incomes. Added to that is the burden on account of food and fertiliser subsidies. Hopes of raising revenue from disinvestment of shares of public sector enterprises are rather dim as the markets continue to be dull. The slowdown in industrial output may mean a drag on resource mobilisation.

These factors exert further pressure on resource mobilisation efforts of the government.

The government has little scope in curbing expenditure either. The mismatch between expenditure and revenue is reflected in GFD as a percentage of gross domestic product rising sharply in recent years. GFD at 6 .5 per cent in 1995-96 shows the hollowness of the government's claim to peg it down to five per cent this year. GFD rose from 6.6 per cent in 1991-92 to 8.3 per cent in 1993-94 but was down to 6.7 per cent in 1994-95.

The government has calculated GFD to fall to Rs 62,266 crore in 1996-97 as per the budgeted estimate (BE) from Rs 64,010 crore as per the revised estimate (RE). This seems a bit far-fetched.

The alternative then is to mobilise resources through tax revenue and tax administration. That is where the real challenge lies.

Ajit Karnik, professor of political economy and a fiscal economist with the Department of Economics, Bombay University says, The budget deficits may go haywire if efforts in mobilisation of resources through tax and non -tax revenue fall short. The government has few options on this front. I do not subscribe to the view expressed in some quarters that the government can relax a bit on deficit front because no close association exists between deficit and inflation.

The fear is inflation can rear its head any time and that will set at nought gains made so far. The real question is whether the government is willing to cast its tax net wide and far. It is time to broadbase direct taxes. In this context extending presumptive tax to more and more luxury items may be worth an attempt.

The government has little choice in slashing expenditure on subsidies, defence and general administration. So it has to increase tax and non-tax revenue to keep a tab on deficit. The tax structure reveals how hard it is going to be for the government. The growth in direct taxes has been tardy.

The share of direct taxes in GDP has increased to 3.4 per cent in 1996-97 (BE ) from 3.3 per cent in 1995-96 (RE). The share of direct taxes to GDP has improved from 2.3 per cent 1990-91 to 3.4 per cent in 1996-97 (BE).

The share should go to four per cent in 1997-98. The share of direct taxes in gross tax revenue has risen from around 19.1 per cent in 1990-91 to 29.4 per cent in 1996-97 (BE). The share of indirect taxes to GDP was 9.5 per cent in 1990-91 but fell to eight per cent in 1996-97 ( BE). However this share should go up to 13-14 per cent in the next five years. The trend so far shows the task will not be easy as it would call for some innovative measures.

Experts say the option for the government is to broadbase direct taxes as raising indirect taxes are fraught with inflationary danger.

More people need to be brought under direct tax net as hardly 1.5 per cent of the population is paying tax. The tendency to avoid taxes by concealing income has not lessened even though tax rates have been slashed over the years in a bid to improve tax compliance. The tax administration may be toned up if the government introduces a separate department to bring the individuals not paying tax under the tax net.

For example a person who gets a large amount of HRA from the employers is entitled to exemption under section 10(13 A) of the Income Tax Act.

In this context a lumpsum presumptive tax on luxury items such as cars, pagers, cellular phones, credit cards, and of course expenditure in luxury hotels can be considered.

The latest Central Statistical Organisation estimates of GDP show substantial growth in the share of the service sector. The service sector and professionals have to contribute their mite to tax efforts.

In direct taxes the share of personal tax in gross tax revenue (GTR) has risen from 9.3 per cent in 1990-91 to 13.8 per cent in 1996-97 ( BE). Lower tax rates through better tax compliance have led to higher tax revenue.

The revised estimates for 1995-96 shows rise of 12 per cent in personal tax collection over the budget estimates. The share of corporate taxes in GTR has gone up from 9.3 per cent in 1990-91 to 14.4 per cent in 1996-97( BE).

Again the revised estimates show a rise of 4.8 per cent in 1995-96. The introduction of the Minimum Alternate Tax (MAT) in the last budget has created a lot of bad blood among corporates besides shaking business confidence.

The all-round cry for scrapping MAT has some justification. Despite MAT, the share of corporate tax in GTR has declined to 14.4 per cent in 1996-97 (BE) as against 14.7 per cent in 1995-96(RE). MAT may not net in much as the trend in corporate profits so far shows very poor growth.

All in all the share of direct taxes in GTR has to go up in the near future as they are deemed to be more effective and efficient instruments for achieving progression than commodity taxes. As far as custom duty is concerned, the government may have to be circumspect, as across the board reduction may hurt a few industries that are against dumping.

The share of indirect taxes to GTR declined from 78.9 per cent in 1990-91 to 70.4 per cent in 1996-97( BE) The share of excise in gross tax revenue has declined from 42.6 per cent in 1990-91 to 35.6 per cent in 1996-97 (BE).The Indian masses and particularly the middle class expects that the government should provide the services in disregard of their actual opportunity cost. That is the reason why the non-tax revenue from fiscal services, general services, social services and economic services rose just by 7.8 per cent to Rs 12,454 crore in 1996-97 (BE).

The PSUs continue to be a poor contributor. The revised estimates show a moderate rise of 9.6 per cent in dividends and profits.

It is time people recognise that in a liberalised market economy, goods and services must reflect their true opportunity cost . A strong economy cannot be built on soft options. The 1997-98 budget should reflect this realism. The real test of the UF government in its second budget lies in raising tax revenues without burdening the common man further.