The Hindu : Tax choices

Online edition of India's National Newspaper
Tuesday, Jul 30, 2002

Opinion

Opinion - Editorials

Tax choices

THERE IS A considerable amount of expectation that when the Union Finance Minister, Jaswant Singh, presents the first batch of supplementary grants for 2002-03 during the current session of Parliament, he will use the occasion to relax some of the provisions of the present tax regime. Unfortunately, the fiscal and economic situation is so fluid that any substantial change could undermine the very fragile basis of the revenue projections for the current financial year.

The 2002-03 budget had projected a growth in gross Central tax collections of 20 per cent, a target that was then seen as an over-ambitious projection. Yet, tax revenue from direct and indirect taxes in the first quarter (April-June) of the current fiscal year have been on target, registering a growth of a little over 20 per cent. The initial reports are that this momentum has been maintained in July as well, though the true level of collections will be known only a fortnight later. The tax collection performance in April-June is especially commendable since it is usually the case that a buoyancy in revenue is more in evidence during the latter half of the financial year. The growth in revenue has not been uniform; direct tax revenue has grown more rapidly and the increase has been almost entirely concentrated in corporate taxes. The surge in corporate tax collections in the quarter was as much as 138 per cent, reflecting payment of a substantial amount of advance taxes. This may not have been as much a consequence of the new tax rates (the surcharge and taxation of dividends) as a recent improvement in profitability. Initial surveys of corporate performance in the first quarter point to a hefty increase in profits. This improvement in profitability must be a consequence, in turn, of a revival of domestic demand which has been showing itself in the modest upturn in the growth rates of industry. Unfortunately for Indian industry the fickle monsoon has placed a big question mark over the continuation of the recovery. Some foundations of the revival, such as the outlays on the National Highway Development Programme, are not likely to be materially altered by any below-normal rainfall. But consumer demand originating in the rural areas is definitely going to be adversely affected and rainfall scarcity that is geographically widespread will have an impact on agro-based industries. In this situation, there can be little certainty about a continuation of the pace of growth of corporate tax collections, or for that matter even of excise duty revenue which recorded a 21.6 per cent increase in April-June.

If the imponderables about the base for excise duty and corporate tax collections should persuade Mr. Jaswant Singh to desist from tinkering with the tax rates in these two areas, this is true as well for collections from customs duty and personal income tax rates. The trend so far in imports and customs revenue has been the one contradictory signal of an industrial revival. The growth of non-oil imports remains sluggish and customs revenue increased by only 6 per cent in the first quarter of 2002-03. Any hike in customs duty rates — to please particular domestic sectors — will lead to a fall in the volume of imports and with that perhaps a decline in collections as well. The most eagerly awaited relief is in the personal income tax regime. But the Finance Minister will be aware that revenue from this source rose by just 6 per cent in April-June 2002 and that any large-scale reduction of rates or restoration of concessions may end up with aggregate collections from personal income tax showing a negative growth over the entire year. Of course, the promise can be made, as it has been made so often in the past, that the effect of lower tax rates will be compensated by the revenue authorities casting a wider tax net. Mr. Jaswant Singh will not be finding it easy to exercise the choice between playing it safe and taking the high risk (and popular) gamble of providing relief to the taxpayers.

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