Adopt fiscal prudence

by April 24, 2020 0 comments

The Govt must implement much-needed reforms to rein in unproductive spends and prevent revenue leakages to create a sustainable basis for balancing its budget

The economic crisis triggered by Covid–19 has forced the Government to take recourse to some extraordinary measures, which include among others 30 per cent cut in the salary of all Members of Parliament (MP) besides the President, Vice-President and the Prime Minister, suspension of the MPLAD (MP Local Area Development) fund and a steep cut in expenditure of Ministries/departments. Reportedly, barring 18 Ministries/departments connected with healthcare, medical infrastructure and other essential services, all others are facing expenditure cuts for the April-June quarter. While 33 Ministries/departments can spend only up to 20 per cent of the budget, for 50 others the expenditure limit is even lower at 15 per cent. This is expected to continue for the remaining quarters of the year.

Faced with the double whammy of mammoth expenditure commitment — mostly on account of having to protect the livelihood of tens of millions in the informal sector on the one hand and steep decline in tax collections on the other, the Government’s worries on account of the fiscal deficit going completely out of control have heightened. This and the dire need to show that our macro-economic fundamentals are strong may have prompted the Centre to cut spending.

Inevitably, this will affect India’s medium to long-term growth trajectory, as implementation of projects gets deferred. In these moments of grave crisis, when saving precious lives and livelihoods is top priority, our policymakers may dismiss it outright. But it can’t detract us from a basic question as to why the Centre and States indulged in fiscal profligacy all through. Why didn’t they ever work to create a buffer for a rainy day? To be precise, four areas need urgent attention.

First, despite lofty declarations of reining unproductive expenditure, including reduction and rationalisation of subsidies (for the poor) these expenses continue to rise. They are mostly due to populist promises such as free food, electricity, water, loan waivers and so on, made by parties to win polls.                    

No wonder, major subsidies continue to increase to unsustainable levels. Food subsidy increased from Rs 1,45,000 crore during 2017-18 to Rs 2,19,000 crore during 2019-20 and is projected to increase further to Rs 2,53,000 crore during 2020-21 (free food for three months in the wake of the Corona crisis will lead to a further spurt). Likewise, fertiliser subsidy continues to hover around Rs 80,000 crore notwithstanding several measures like neem coating of urea or changes in the pricing norms for urea manufacturers aimed at reducing costs.

There are a host of subsidies given by States such as power, irrigation, credit, bonus over and above the Minimum Support Price (MSP) notified by the Centre, payment of sugarcane arrears to farmers, farm loan waivers and so on, which cost them hundreds of thousands of crores. Studies have shown that a major slice of these subsidies is cornered by better-off farmers (those with land holding over two hectares) even as the majority of resource-poor farmers are left out.

Second, tax collection is not only far below other countries but also has been consistently lower than the target fixed by the Government itself. The tax-Gross Domestic Product (GDP) ratio in India — the Centre and States’ tax revenue — was 17 per cent during 2018-19, which is almost half of the average tax-GDP ratio of the Organisation for Economic Co-operation and Development, a club of rich/developed countries at 34.3 per cent during 2018. During 2019-20, the total tax revenue of the Centre — after devolution to the States — was Rs 2,00,000 crore less than even the revised estimate (RE) at Rs 14,00,000 crore and Rs 4,00,000 crore lower than the budget estimate (BE) at Rs 16,00,000 crore.

This has a lot to do with the inability of the tax administration to make industries, businesses and High Net Worth Individuals (HNWIs) pay their fair share of taxes. This is exacerbated by cumbersome tax laws and slow-moving judicial systems which tax evaders exploit to the hilt. The tax dues locked up in litigation run into thousands of crores. To get an idea, let us look at the following.  

Under the Sabka Vishwas Scheme (SVS) that offered to settle disputes relating to excise and service tax prior to the Goods and Services Tax from July 1, 2017, a total of about Rs 2,50,000 crore indirect tax dues from 1,83,000 assessees were involved.

Fed up with protracted litigation and desperate to garner some revenue, the Government offered relief, varying from 40 per cent to 70 per cent of the tax dues depending on the amount involved in disputes other than those covered under “voluntary disclosure.” All that it got was a paltry Rs 38,000 crore or 15 per cent of the total dues.   

The disputed amount of direct taxes — both corporate and personal — is much higher at Rs 9,96,000 crore involving close to 5,00,000 cases (according to the Parliament Standing Committee on Finance). In her Budget speech for 2020-21, Finance Minister Nirmala Sitharaman announced a scheme christened Vivaad se Vishwas (VSV) wherein the assessees need not pay interest and penalty if the disputed amount is paid before June 30, 2020. Being much less attractive than the SVS, the VSV may turn out to be a damp squib.   

In a bid to look business-friendly, the Narendra Modi Government has gone to extreme limits to offer tax concessions that have led to huge revenue loss. For instance, under the presumptive tax scheme, for businesses having a turnover of up to Rs 2 crore per annum, their profit is presumed as eight per cent of the turnover (six per cent in case, the firm conducts all its transactions in digital mode).

For a firm having a Rs 1 crore turnover and doing it all digitally, its income is taken as Rs 6,00,000 on which the tax works out to a mere Rs 33,000 against much higher tax liability on actual profit (e.g. taking profit at 10 per cent or Rs 10,00,000, this would be Rs 1,16,000 with profit at 20 per cent, tax will come to Rs 4,25,000). Given the culture of tax evasion  nurtured for generations in business communities, one won’t be surprised if several of them may not be paying even a paltry Rs 33,000 to cite the above example.           

Third, the Government is banking too much on petroleum products (POL) for boosting its revenue. During 2018-19, the Centre mopped up Rs 2,58,000 crore from this sector (Rs 2,14,000 crore from excise duty alone), whereas States garnered Rs 2,27,000 crore of which Value Added Tax) alone contributed Rs 2,00,000 crore.

Both grab every available opportunity to hike taxes on POL. Effective March 14, the Union Government hiked Central Excise Duty (CED) on petrol and diesel by Rs 3 per litre each from an already high of Rs 20 per litre and Rs 16 per litre respectively. Further, in the wake of the Corona crisis, it has also taken Parliament’s nod for further increase in CED by up to Rs 8 per litre each, any time it wishes.

This has resulted in a situation wherein taxes (CED and VAT) alone account for over 50 per cent of the retail price of these products. High tax on fuels comes at a heavy cost to the economy. This contributes to increased inflation, higher subsidy payments on fertilisers, food, irrigation and so on, which takes away a good slice of the higher revenue from fuel tax. This is a classic case of “taking from one hand and giving back from the other.” Besides, a lot of revenue is also foregone due to stunted growth of industries which are rendered uncompetitive, courtesy high fuel and power cost. 

Fourth, the Government continues to hold on to several Public Sector Undertakings like Bharat Sanchar Nigam Limited, Mahanagar Telephone Nigam Limited, Fertiliser Corporation of India Limited, Hindustan Fertiliser Corporation Limited and so on, which have been making losses year-after-year.

These are neither closed nor restructured to restore viability of their operations; even as they are kept on the ventilator perennially draining out thousands of crores from the public exchequer.

Add to this the money the Government has been losing in recapitalising Public Sector Banks (PSBs) facing capital erosion due to ballooning non-performing assets (NPAs). During the last five years or so, it has pumped in over Rs 3,50,000 crore and more capital infusion is not ruled out given the unfolding NPA scenario.                  

The Government needs to implement much-needed reforms to rein in unproductive spends, including subsidies, and prevent revenue leakages to create a sustainable basis for balancing its budget. It must create revenue surplus so that it can deal with crisis situations without jeopardising development. The private firms should also change their mindset of leaving it entirely to the State to take care of workers in the informal sector. They need to ponder over funding “income support” to them during a crisis, like the one we are facing right now.

(Writer: Uttam Gupta; Courtesy: The Pioneer)

No Comments so far

Jump into a conversation

No Comments Yet!

You can be the one to start a conversation.

Your data will be safe!Your e-mail address will not be published. Also other data will not be shared with third person.