Tax system - more laxity than elasticity!

By S. Swaminathan

Excepting the good tidings on the monsoon and the forex reserves situation, the economy continues to be in the grip of a severe slowdown. While the Governor of the Reserve Bank of India, Dr. Bimal Jalan, has ventured an optimistic forecast of a 5.5-6 per cent GDP growth for the current year, the National Council of Applied Economic Research (NCAER) has put out an estimate of 6.3 per cent. The trouble with all such estimates is that they seem to give exaggerated weightage to the monsoon factor as the prime mover in the economy. Even the Centre for Monitoring Indian Economy (CMIE), in its July 2001 Monthly Review, has projected a growth rate of 6.3 per cent as against the 5.2 per cent for 2000- 01 estimated by the Central Statistical Organisation (CSO). The CMIE projection of GDP at factor cost, at current prices, for 2001-02, at Rs. 2235,000 crores, implies an inflation rate of 6.7 per cent as against 7.1 per cent during 2000-01.

Tax revenue on a roller-coaster

Granted that industrial growth during the first quarter has been abysmal at 3-4 per cent, the slippage in Centre's tax revenue, net of States' share, to Rs. 6,089 crores during April-May this year from Rs. 10,428 crores during the same period last year, cannot but be a disconcerting factor, coupled with the information that the Central Government has, during the first four months of the current year, completed as much as 55 per cent of the total market borrowings envisaged for the whole fiscal year.

Seen in the background of the fiscal performance during 2000-01, the steep decline in tax revenue collections during the current year so far gives room for serious apprehensions about whether or not the projections of tax revenue in the Centre's budget suffer from flawed perceptions of economic trends. In 2000-01, the budget estimated the gross tax revenue at Rs. 200,288 crores as against the ``actuals'' for 1999-2000 at Rs. 171,752 crores or an increase of 16.6 per cent.

In the event, as recently disclosed by the Finance Minister, Mr. Yashwant Sinha, the gross tax revenue has shown a slippage of about Rs. 5,000 crores even in terms of the revised estimates of Rs. 198,321 crores which means that the collections turned out to be less than budget estimates by 4.5 per cent. And this in a year when the nominal GDP grew at around 12 per cent.

The question for policymakers, therefore, is whether or not the tax system, in its totality, is operating dysfunctionally in terms of the realities of the macro-economic system, despite all the talk about tax reforms and rationalisation apart from the much-touted improvement in compliance.

Targets for 2001-02

A disturbing feature of budgeting, particularly with reference to the post-liberalisation period, has been its proneness to wide variations as between estimates and the actuals - both in revenue receipts and expenditure.

Unrealistic target-setting, not always arising from methodological inadequacies, has often vitiated the budgetary process. A certain bureaucratic habit of pandering to the political executive's preferences for a ``smartly dressed-up'' budget seems, over the years, to have led to over-estimation of tax revenue and under-estimation of expenditure on the revenue account. This has possibly resulted in the fiscal deficit ``breaching'' the outer limits set in the budget, as a matter of course.

The Finance Ministry's projection of gross tax revenue for 2001- 02 at Rs. 226,649 crores, represents an increase by as much as 17.3 per cent in relation to the actual collections during the previous year.

Direct taxes are projected at Rs. 84,800 crores - an increase by 15.5 per cent. While corporation tax is projected to yield Rs. 44,200 crores - an increase by about 15 per cent - income-tax is projected to fetch Rs. 40,600 crores or about 15.5 per cent more this year.

The issue is not whether the increase contemplated in direct taxes collections would be incompatible with the performance of the economy during the current year.

Consider the record of corporation tax collections over the seven-year period, 1993-2000. From a ``high'' of 37.4 per cent growth in 1994-95 to a ``low'' of 7.8 per cent in 1997-98, there have been wide divergences in the ``performance'' of the Central Board of Direct Taxes (CBDT), even allowing for variations in the process of economic growth.

That similar gyrations in income-tax collections, took place during this period, with the year 1997-98 recording a ``rock bottom'' level - a decline in collections by 6.2 per cent - would perhaps reinforce the point that the tax machinery would call for an overhaul.

Given the fact of an industrial slowdown that has persisted for more than three years, the target set for Union excise duties for the current year at Rs. 81,720 crores - an increase by about 16.5 per cent - appears rather ambitious. The average annual increase during the three-year period 1998-2001, in Union excise duty collections, has been around 13.5 per cent.

While chambers of commerce and industry seem legitimately worried about the Central Board of Excise and Customs (CBEC) wielding its armoury of powers arbitrarily against manufacturers in a bid to ``rise to the occasion'', there seems to be equal validity in the perception that the target-mania may prove counterproductive and that a spate of avoidable litigation and accumulation of arrears may ensue.

Even with regard to Customs duties, the target of Rs. 54,822 crores - an increase by 10 per cent - could well prove an over- estimate, given the continuing sluggishness in imports and the perceptions of tax evasion occurring through collusion of customs personnel.

Systemic reforms not yet in place

In the welter of public debate on fiscal policy, the well- orchestrated concerns over the quantum and level of fiscal deficit of the Government have clearly upstaged the question of instrumentality of the tax system for raising the financial capabilities of the Government for serving the cause of social equity without jeopardising economic efficiency.

That the tax/GDP ratio, for the Centre, has declined from around 10 per cent in the immediate post-liberalisation period to around 8.75 per cent in 1999-2000, gives the lie to the official claim that tax reforms have made a difference to the climate of compliance.

On the contrary, what seems to be at work is a tendency for large areas of the economy, including admittedly the services sector, enjoying relative immunity from taxation, both by design and by the widespread combination of laxity and wrong-doing with reference to tax enforcement.

It could be nobody's serious assertion that as a result of economic reforms, the taxation system has become more efficient and less corrupt or that the pervasive hold of ``black money'' has been resolutely combated. The belief that tax reforms would call for enormous strides in simplification of laws cannot be over-stated.

Yet, mere elaborate exercises in re-writing the tax laws can never be a substitute for a process of tax enforcement which is purged of its all-too-familiar excesses of procedural harassment of the tax-payers at the cost of expeditious collection of revenues.

The fact that the outstanding demand for tax arrears of all types, for the Centre, exceeded Rs. 50,000 crores around July 2000 is no testimony to the tax system!

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