Budget 2105: Only an overhaul of tax system can plug the revenue leakages

By Narendra Jhaveri

Having produced his first budget in the conventional mould, finance minister Arun Jaitley would be under pressure to present a path breaking budget, especially as achhe din are still eluding.

We will have to wait for the Jaitley magic, if any, to unravel but given the preemptions of debt servicing, redistribution priorities and defense on the one hand and low growth on the other, it would not be surprising if the budget for 2015 remains in conventional mould – tinkering with tax rates, exemption limits and token provisions for all kinds of pet schemes of the prime minister.

If so, it would add to long-term structural fiscal and economic damage through underfunded, unfinished projects and huge time and cost overruns.

I believe Jaitley’s key priority should be to help growth acceleration without creating inflationary pressures. First green shoots of improvement in investment climate and domestic demand are visible. Under these circumstances the best course would be not to tinker with tax rates, limits, capital gains tax, wealth tax or impose inheritance tax as advised by some. Negative noise of these would far outweigh small revenue gain.

He should also avoid temptation to reintroduce failed taxes such as fringe benefit tax or cash transactions tax as suggested by Tax Administration and Reform Commission (TARC, Report III). Risk of recovery being nipped in the bud is quite high through adverse impact on sentiment. What can FM do in these circumstances? He must go to the basics of the role of the government as service provider aiming it high socio-economic benefit cost ratio.

Actionable goals should be stopping revenue leakages, enhancing operational efficiency of tax administration and public expenditure. While this may not be a glamorous exercise, if efficiently executed it would maximise socio-economic return on taxpayers’ money, be fair to honest taxpayers and raise, painlessly, additional resources on a recurring basis and thereby laying robust foundation for automatic revenue buoyancy.

However, the finance minister will have to remember that no comprehensive administrative reform is possible without political will. And he would need all his courage and ingenuity as there is enough proof of extremely weak, incompetent organisation and waste of energy through misallocation of limited manpower resources.

For a wholistic approach to reforms some basics need to be understood. Talking about tax rates is sexy but clearly revenue from taxes and user tariffs is a function of policies and rates on the one hand and, mundane but important variable, execution efficiency on the other.

For comprehensive reform from grassroots, FM ought to visualise central government as a mammoth and complex service organization, unique in terms of size, regional spread, range and complexity of services, for instance, public goods with externalities, allocation of non renewable resources, ensuring minimum standard of living for all and so on.

There are two key parameters for reform of a service organization - attitudinal and organizational. Customer relationship management (CRM), key accounts, segment focus and so on have developed into an artful science for efficient service delivery in private sector.

True, tax administration is not marketing shampoos but nor is it catching thieves. The attitude of tax collectors is all taxpayers are potential criminals. Confrontation rather than cooperation is built into the mindset and stance of legislation. Whereas in India litigation dominates, universal experience is that strong enforcement and improvement in voluntary compliance have invariably expanded revenues and base. On expenditure side, mindset is that the government is obliging economically deprived citizens by providing a variety of welfare services.

Finance ministers have avoided comprehensive reforms, charitable but untrue explanation, because of not realizing huge revenue and productivity gains of administrative reform. Jaitley too may fail the nation if he conducts reform, as he said to a media interviewer, that reform is the art of possible, meaning pursuing reform without hurting vote banks.

But with the absolute majority of this government, this might be India’s only chance to bold and grassroots administrative reform for raising tax-GDP ratio through expansion of tax base. A number of countries, according to IFC-PWC reports, have improved tax income ratio through reforms, over time. This is also the time to include high agricultural incomes as part of the tax base. So also some professional incomes exempted from service tax. Indeed small farmers, like other small income earners must enjoy exemption but it defies all natural justice if large commercial farmers are excluded.

Sensible reform must have basic design and strategy. Prioritization and focused allocation of scarce resources are key elements. For instance, all areas where the use of cash predominates are evasion prone areas - small and medium businesses, traders, doctors, lawyers, being some examples.

A separate cell should be set up, and if there is one it should be made effective, for each of such tax payer groups and staff should be conversant to handle IT, for instance, matching PAN with transactions.

As regards expenditure, there is no need for more commissions. The government’s endeavour should be to expedite completion of unique identification and move on with targeted subsidies through direct transfer to beneficiary family account.

One key area of reform is government contracting, which is a leaky drain for ill-gotten wealth generation. For all this to happen, valuable suggestions of TARC, such as elevating the status and enhancing autonomy of Central Board of Direct Taxes (CBDT) and Central Board of Customs and Excise(CBCE) should be implemented sooner rather than later.

In conclusion, not much would be lost if the next budget fails to be a conventional dream budget. In fact, stability in tax structure should be enough to enthuse markets.

To raise resources, the government can depend upon selling of scarce resources such as spectrum and coal auctions and above all, improving marketability of state enterprises through autonomy and result oriented accountability, so that towards the end of the year sizable disinvestment can happen at attractive valuations. By 2016-17 GST also would be in place. By that time, if government is serious and executes efficiently, administrative reform would definitely help boost tax-GDP RATIO to move up to a respectable level of between 16 to 18 per cent.

The author is independent director, Edelweiss