Fiscal facts

Half-way through the financial year, the news on the fiscal front is better than might have been expected, but not without some worry points.

Tax collections have been buoyant, with a 21 per cent increase in revenue till September, matching the projected increase in the Budget for the year as a whole. The target for the year is certainly ambitious, since last year had already seen a 21 per cent increase in tax collections; however, the buoyant economic conditions have helped the finance minister.

Service tax collections (with 65 per cent growth) have been particularly noteworthy, as have customs revenues (up a healthy 24 per cent, thanks to the high oil prices and the general spurt in imports).

The corporate sector has been doing well, so corporation tax has seen a 28.6 per cent increase despite the loss of some revenue from the troubled oil sector. If there has been disappointment, it must be with excise collections (up only 6.5 per cent, despite the surge in manufacturing activity) and with personal income tax (up a modest 18 per cent even after you include collections under the new fringe benefits tax and the securities transaction tax).

Excise revenue growth at 6.5 per cent is perplexing, and a far cry from the budgeted growth for the year of over 20 per cent. Normally, such divergence would suggest large-scale evasion. Other issues would be the multiplicity of tax rates and the large number of exemptions built into the system.

Apart from the tax losses that these create, the Cenvat chain breaks down and so the collection efficiency that is supposed to get built into the system proves elusive. The surge in exports is also a reason for lower excise collections as credits have to be given for export production.

In the case of customs duty, too, there is a case to be made for simplification since it has been estimated that import duty concessions today add up to over Rs 41,000 crore, or around 70 per cent of total collections. The standard manual on the tariff structure still runs into something like a thousand pages.

General exemption No. 107 of the customs manual, for instance, runs into 92 pages, has 441 exemptions and an additional 47 lists that specify products for which various exemptions can be given. In order to get all these exemptions, exporters have to get sundry bureaucrats to certify that their products fall under the exempted categories. Much better, then, to go for a uniform tax which will eliminate the incentive for misclassification, and also to reduce the number of exemptions.

Even in the case of personal income tax, anecdotal evidence suggests continued leakage. An analysis of the tax-paying categories buttresses this conclusion, since the numbers reporting substantial incomes are pitifully small—and present a picture that is contrary to the evidence of everyday reality.

The finance minister has sought complicated, paperwork-intensive solutions to the problem; he should in fact be making effective use of the tax information network to nab evaders.

As for expenditure, the finance minister has pulled up his party’s chief ministers at the Chandigarh conclave last week for not spending enough on key programmes. This is of course the usual state of affairs.

However, Mr Chidambaram’s exhortation to spend suggests that he is confident of staying within his budgeted fiscal deficit—although the deficit numbers for the initial months of the year are on the high side.