A surcharge to give Rs. 6,000 cr. for relief?

If one were to go by the remarks of the Prime Minister, Mr. Atal Behari Vajpayee, more taxes to meet the costs of reconstruction in Gujarat may be announced soon. Already the earlier willingness among tax payers to contribute to the Gujarat effort is giving way to consternation about higher taxes. Relief and rehabilitation will cost more than the Rs. 1,300 crores that the 2 per cent surcharge introduced last week will collect this year, the Rs. 500 crores that the State has got from the National Calamity Contingency Fund (NCCF) and the Rs. 100 crores or so that has come from abroad. The fact is that the Centre already imposes surcharges which it is now using to cover the hole in its finances and which really should be diverted to the Gujarat programme.

Surcharges are supposed to be temporary measures imposed for specific periods in the event of an emergency. But successive Central governments have loved to use surcharges for long periods for a simple reason - the States have no right to these revenues. (Even after the pooling of tax revenue that has taken place after the Eightieth Amendment, surcharges remain outside the divisible pool. There were three surcharges before last week: (1) a 10 per cent surcharge on corporate tax introduced in 1999-2000, (2) a 10 per cent surcharge on income tax, also in 1999-2000, which for those with a taxable income of more than Rs. 1.50 lakhs a year was raised in 2000-01 to 15 per cent and (3) a one per cent surcharge on corporate tax imposed last December, in line with the Eleventh Finance Commission's recommendations to finance the new NCCF that is supposed to assist States cope with severe natural disasters.

The problem is with the first and second surcharges. Here is what the Union Finance Minister, Mr. Yashwant Sinha, said while presenting the budget for 1999-2000: ``I face the difficult task of containing the revenue and fiscal deficits on the one hand and on the other meeting the growing development expenditure...With these considerations I propose to impose an across-the-board surcharge of 10 per cent... This is in the nature of a temporary surcharge.'' That was almost two years ago. Then while presenting the Budget for 2000-01, he said, ``Although the 10 per cent surcharge imposed last year was meant to be temporary, I am constrained to continue with it in view of the heavy and unexpected expenditure burden, mainly on account of defence requirements and transfer to States mandated by the Finance Commission... I now propose increasing the surcharge moderately...''

These were peculiar arguments. One, containing deficits and mobilising funds for development never was an ``emergency'' challenge. It is a part of the year to year job of the Finance Ministry. If more revenue was needed it should have come from higher taxes and/or better collection of existing tax rates. The challenge that Mr. Sinha faced in 1999 was no different from that earlier in the 1990s. The only reasons then for the surcharge were (1) to give the illusion that taxes were not increased and (2) the Government did not want the States to get any part of the revenue.

Naturally, the surcharge was continued the next year as the ``emergency'' of large deficits and limited resources for development continued. While the costs of the Kargil conflict of 1999 offered half a justification for the increase in the surcharge, the other half of a reason was also peculiar: the statutory transfers to the States. The resources that are devolved to the States are supposed to come from the ``normal'' tax revenue and anything that the Finance Commission recommends is based on an assessment of the Centre's finances. They do not constitute any emergency.

So what we have now are two surcharges that were either not justified in the first place or are no longer necessary (military inventories run down in Kargil must surely have been replenished by now). They yielded Rs. 5,600 crores in 1999-2000 and they are expected to collect Rs. 6,000 crores in 2000-01. This is a fairly large amount that Gujarat (and Orissa one of whose MPs has justifiably expressed his unhappiness about the relatively scant attention his State got in comparison to what Gujarat is receiving) can do with. The Finance Minister can do a simple thing in the coming budget: Abolish them and replace them with identical surcharges earmarked exclusively for the reconstruction effort. That would yield more than Rs. 6,000 crores for reconstruction. To please the tax payers he can even remove the 2 per cent surcharge that was imposed last week. But Mr. Sinha is hardly likely to do that because the ``emergencies'' of large deficits, a resource constraint, rising defence outlays and the demands of statutory transfers will continue to justify the existing surcharges.

CRR

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