Coming after a wait of almost six months, the Uni on Budget had kindled hopes in many breasts only to be dashed rudely by the Budget document. People who had set their sights on increasing their take home in come were left wondering whether they were better off earlier. This is a familiar happening; every year the Union Budget raises expectations to stratospheric levels, which are belied because for the Government, taxation is merely a source of revenue, not an instrument to distribute largesse. The Indian tax system was developed under the guidance of celebrated Hungarian-British economist Nicholas Kaldor, who advised no less than eight countries on tax policy.
Over the years, the holistic tax system envisioned by Kaldor has changed beyond recognition. Wealth-Tax Act, Gift-Tax Act and Estate Duty have been repealed, while the Income Tax Act has been amended beyond recognition. Consequently, the Income Tax Act has become exceedingly complex and iniquitous. Over the years, despite roaring inflation, minimum income liable to tax has remained almost the same, putting a great burden on the bottom tier of taxpayers. We have two taxation systems, the old regime and new regime, whi ch unnecessarily confuse small taxpayers, who cannot file their return without professional help imposing a considerable compliance cost on them. As far as businesses are concerned, manufacturing companies pay tax @ 15 per cent, most other companies @22.5 per cent but firms, who run small businesses are taxed at a flat 30 per cent.
This anomaly is reflected in tax collections for the first quarter of the current year personal income-tax collection was 65 per cent higher than corporate tax collection. Another anomaly is that col lection of indirect taxes, that are regressive in nature, affecting the poor and rich equally, is almost equal to that of the progressive direct taxes. Currently, GST collections are galloping so fast that the Government has dis continued publishing monthly collection figures for GST. More over, the structure of GST is complicated, with five rates of GST with some articles, like jewellery, being taxed at special rates.
Most countries in the world have one rate for GST, some have two but only four-five countries have five GST slabs. Then we have VAT on petroleum products and alcohol. This has made indirect taxation need lessly complicated, leading to multiple frauds that we read about every day. An overhaul of the GST structure with a view to lessen incidence of GST on the poor is desperately needed. According to the latest Oxfam report “Survival of the Richest: The India Story,” a little less than two-thirds (64.3 per cent) of the total GST is paid by the bottom 50 per cent of the population, one-third of the GST is collected from the middle 40 per cent, and only 3-4 per cent from the richest 10 per cent of the country. It would appear that the present Government believes in a top-down approach money in the hands of large corporations, in the form of tax cuts and subsidies like PLI, would fuel GDP and job growth. However, the downside of this approach is now be coming visible; manufacturing-led growth has not happened ~ the share of manufacturing in national GDP has remained almost static, and with most factories being fully automated, jobs are shifting away from the manufacturing sector.
Another distinctive initiative of the Government is spending on infrastructure, which has outpaced spending on other sectors; resultantly, we now have worldclass airports, roads and railway stations. But this has come at a huge cost. Central Go v ernment expenditure, in real terms as share of GDP, has shru nk since 2017 (barring the two Covid years), with proposed ex penditure (again in real terms) for the current financial year be ing less than the Revised Estimates for FY 2023-24. Given that tax ratio is estimated to increase, the proposed budget is actually contractionary in real terms.
Then, expenditure on infrastru cture building has crowded out expenditure on vital sectors like healthcare, education and even defence, resulting in Agniveers and sub-standard hospitals and schools. Since almost all infrastructure projects are debt-funded, Government borrowings have bal looned, making debt servicing the biggest component of the Budget. Also, most of the ma terial for the Government’s grandiose infrastructure projects are sourced from China; many of the contractors are foreign, read Chinese, so, downstream be nefits do not flow to local firms. With the Government being perpetually in headline grabbing mode, mundane things like regular maintenance of infrastructure are put on the back-burner, leading to falling bridges and crashing trains. Moreover, every project or scheme is denominated in lakhs of crores of rupees, with the rider that ‘it is over 5 ye a rs,’ leading to lax monitoring. In this scenario, one may very well ask: What was wrong with the late lamented five-year pla ns, which prescribed targets and kept an eye on achievements? The vexed question about the budget deficit and Government borrowings has been left un answered.
According to the Fiscal Re sponsibility and Budget Management (FRBM) Act 2003, fiscal deficit was to go down to 3 per cent of GDP by 31 March 2008, and reduce annually by 0.3 per cent thereafter, yet the fiscal deficit on 31 March 2024 was 5.8 per cent of GDP, budgeted to come down to 4.9 per cent in FY 2024-25 ~ still far in excess of what was originally envisaged by the FRBM Act. Also, according to FRBM, Central Government Debt should not exceed 40 per cent of GDP by 2024-25, but according to Budget Estimates, Central Government Debt is slated to touch 82.4 per cent of GDP by 31 March 2025. The ills of uncontrolled State borrowing are many; it is a debt we incur but which is repaid by future generations. Almost two and a half centuries ago US President Thomas Jefferson had observed: “The principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.” Thus, there are many good reasons for reducing Government expenditure. Unfortunately, all such reasons pale into insignificance in the face of compulsive populism.
The FRBM Revi ew Committee Report made a host of recommendations for en suring fiscal prudence, including the setting up of an auton o mous Fiscal Committee to ma nage fiscal strategy. None of the Committee’s recommendations have been implemented. Also, the Fifteenth Finance Commission had recommended a review of Central Schemes, with axing of unviable ones. However, Revised Estimates for Financial Year 2023-24, show an expenditure of Rs.19.06 lakh crore on Central Schemes, which is budgeted to grow to Rs.20.21 lakh crore in Financial Year 2024-25, with no review of Central Schemes in sight. Obviously, an efficient tax system along with a brake on profligacy can help the Government balance its books.
Reform of the tax structure, which sque ezes small people and small bu sinesses, was not attempted by the Budget. The least that could have been done was to adjust the minimum income liable to tax for inflation. Consumption, which fuels growth, can be boos ted quickly by leaving more money with poor and middle-income people, who tend to spend the extra income earned by them. Contrarily, the rich, who are already spending at a substantial level, rarely spend the extra income earned by them. Rationalisation of GST, with a view to lower its inciden ce on the poor, would also help in this exercise. But sadly, the Budget spared no thought to the review of the overall taxation structure. Even in the third decade of the twenty-first century, Direct and Indirect taxes operate in different silos in India.
The most the Finance Minister could suggest was a comprehensive review of the Income-tax Act, never mind that since 1985, many similar attempts had been made by her predecessors. It is significant to note that most advanced countries, including the UK and USA, have integrated direct and indirect taxes long ago. The first report of the Tax Administration Reforms Commission (headed by Dr Parthasarthy Shome), submitted on 30 May 2014, suggested integration of the two Revenue Boards, but even this suggestion got lost in the turf wars of the finance ministry. Government economists sitting in the rarefied environs of North Block, who double budget size every three years, could well heed the words of US economist Martin Feldstein: “Increased government spending can provide a temporary stimulus to demand and output but in the longer run higher levels of government spending crowd out private investment or require higher taxes that weaken growth by reducing incentives to save, invest, innovate, and work.”
(The writer is a retired Principal Chief Commissioner of Income-Tax)