MARCH 13, 2015

By TIOL Edit Team

MONEY makes the mare go. If this proverb is applied to tax receipts, then tax buoyancy can be considered as key driver of the economic growth. With a similar perspective, International Monetary Fund (IMF) has tried to drum into the Finance Ministry the crucial importance of expediting tax reforms.

IMF's advice, contained in two documents that were released on 11th March, is appropriate as the Government is aiming for 8% growth in 2015-16 and over the medium term. IMF's recipe is also timely when we take into account the Union Budget's Fiscal Policy Strategy Statement (FPSS) and Medium Term Fiscal Policy Statement (MTFPS). The Budget documents give no idea as to when India would achieve the highest tax-GDP ratio of 11.9% that was attained in 2007-08. The tax to GDP ratio has remained around 10 per cent with tax buoyancy less than one in the recent years.

As pertinently stated by IMF Working Paper (IMFWP) captioned ‘Pressing the Indian Growth Accelerator: Policy Imperatives,' "The immediate priority is to achieve the kind of fiscal quality and low inflation levels exhibited during 2003-08, with focused attention to increasing efficiency and compliance in tax revenue collection. Higher tax revenues can facilitate increases in public investment, which then crowd in private investment."

Similarly, the IMF Country Report on India has also pitched for focused tax reforms. It suggests: "India's revenue-to-GDP ratio is considerably below its peers. A well-designed goods and service tax (GST) should be implemented, with minimal exemptions and a moderate single rate, as it would create a single Indian market, enhance the efficiency of internal movement of goods and services, and thereby boost GDP growth. Progress towards a revised direct tax code, with smaller and streamlined deductions, would also help. Efforts to improve tax administration, including along the lines outlined in the Tax Administration Reform Commission (TARC) reports, should continue."

It remains to be seen whether Finance Ministry would pay heed to the idea of unveiling a revised direct tax code or stick to its stance of dropping the idea as announced by Finance Minister Arun Jaitley in his budget speech.

He stated: "Enactment of a Direct Taxes Code (DTC) has been under discussion for quite some time. Most of the provisions of the DTC have already been included in the Income-tax Act. Among the very few aspects of DTC which were left out, we have addressed some of the issues in the present Budget. Further, the jurisprudence under the Income-tax Act is well evolved. Considering all these aspects, there is no great merit in going ahead with the Direct Tax Code (DTC) as it exists today."

The public has a right to know and understand what the demerits of formulating a comprehensive, simple and durable DTC are. A detailed official statement on this would be welcome.

IMF has rightly pitched for implementation of recommendations of TARC. These include merger of Central Board of Direct Taxes (CBDT) and Central Board of Excise and Customs (CBEC), setting up of tax policy council, adoption of improved dispute resolution processes and changing certain tax policies.

In the budget speech, Mr. Jaitley stated that TARC's recommendations are in "advanced stage of examination and will be appropriately implemented during the course of this year. Unfortunately, it has, however, already made up its mind against CBDT-CBEC merger."

The IMF Staff Report says: "The authorities (finance ministry officials) disagreed with staff on the desirability of merging direct and indirect tax boards, arguing that functional specialization remains necessary."

The merger would create new opportunities for officials of the two boards in sharing of innumerable value leads in detection of tax avoidance and evasion. The merger would certainly not checkmate their functional specialization.

Now that the Modi Government is well settled and holding the reins firmly, it should issue a discussion paper on draft road-map for tax reforms. This ought to be based on the recommendations of TARC, Finance Commission, Public Accounts Committee, etc.

The roadmap should be announced in the same spirit as Mr. Jaitley's intent incorporated in budget speech to reduce corporation tax to 25% over four years from present 30%.

Factoring in this announcement, IMFWP has focused on the urgency for shoring up personal income tax receipts through broadening of tax base, levy of withholding tax, etc.

IMFWP's contends that the number of income taxpayers can be increased from the present 35 million to at least 60 million. It has also implied the need for higher taxation of dividend-receiving tax-payers.

It says: "the category of taxpayers with incomes above Rs. 1 million normally gets substantial dividend income, which is currently tax-free in the hands of the investor as the company distributing dividend pays dividend distribution tax at the rate of 15 per cent. Hence, such high income individuals are taxed at a lower overall effective marginal rate than those having little or no dividend income. The need to focus on expanding this category of taxpayer base, therefore, is crucial at this point."

Pitching for increase tax-GDP ratio, IMF WP says: "Cross-country analysis indicates that the general government revenue/GDP ratio in India is quite low, even taking into account its per capita income."

According to FPSS, In FY 2013-14, Tax to GDP stood at 10.0 per cent of GDP. Tax to GDP ratio of 10.6 per cent was targeted in 2014-15 budget estimates. However, in revised estimates for 2014-15, Tax-GDP ratio has been revised to 9.9 per cent. The Budget 2015-16 projects tax-GDP ratio at 10.3 per cent.

Similarly, MTFPS has projected tax-GDP ratio at 10.5 per cent for 2016-17 and 10.7 per cent for 2017-18. It does not indicate when the ratio would reach the 2007-08 level and thereafter move further upward.

These subdued projections call for a determined and comprehensive approach towards tax reforms.