Plug the gaps first

Finance Minister P. Chidambaram will have stitched up his Budget proposals by now. It must be hoped that he has given thought to plugging the major gaps in revenue collection, especially in the relatively neglected area of commodity taxation. While compliance rates have gone up when it comes to income tax, there appears to be a serious problem with excise duty collections, which continue to grow slower than industrial production. As the Kelkar report on the implementation of the fiscal responsibility law showed, the excise net appears to be getting more (and not less) porous; while the ratio of excise duty to industry GDP (for the non-oil sector) was around 16.4 per cent in 1980-81, this fell by more than half (to 7.7 per cent) by 2003-04. Indeed, while estimating future tax collections in order to be able to project whether India was on course to meet the targets for fiscal correction, the Kelkar committee assumed a tax buoyancy of 0.98 for excise collections under the reforms scenario — the actual buoyancies, however, are barely 0.53. Not being able to achieve the increased buoyancy, naturally, will lead to significantly lower excise duty collection.

One way out is to wipe out the plethora of tax exemptions that are in the books. A recent report by National Institute of Public Finance and Policy (NIPFP) estimates that these are worth Rs 55,000 crore, including income tax exemptions to agriculture, exports and housing. That is around a seventh of the total tax collections. Apart from the revenue lost on account of the exemptions themselves, the exemptions also make tax collections difficult in non-exempt sections. So, a company that pays excise duties finds it easy to pay less by declaring some part of its production as taking place in new excise havens like Uttaranchal and Himachal Pradesh. Whether the production shown as taking place in these states is actually taking place is anybody’s guess and too daunting a task to actually monitor. Add to this the exemptions for small-scale units, and the problem multiplies manifold. Of course, since the government has just decided to come out with a fresh set of incentives for SEZs, its ability to cut existing exemptions would appear limited.

The other solution that Mr Chidambaram needs to work on is extending the Tax Information Network (TIN) to the excise sector. Since the TIN extends to over 600,000 firms/establishments already, a good idea would be to formally link this with excise duty collections. Indeed, since Mr Chidambaram is a votary of a combined goods and service tax, with tax set-offs on goods to be available to services and vice versa, this needs to be followed to its logical conclusion. Today, firms that file their service tax returns find them automatically getting rejected if the firms they have paid service tax to are not registered. If this was extended to the combined goods and service tax, the increase in the catchment would be tremendous as firms which bought inputs from those that have not paid excise duty would find their excise returns getting rejected automatically.

Theoretically, you can have this impact even if you apply it only to firms paying excise duties. But since you will get a larger number of firms when you apply it to firms paying service tax (an Infosys must be buying a lot of manufactured products on which excise is payable, for instance), using this is a better idea.