MARCH 06, 2016

By Naresh Minocha, Our Consulting Editor

"Prime Minister Narendra Modi on Monday asked his Cabinet colleagues to treat the BJP's poll manifesto as a sacred document like the Bhagvad Gita and read it every day to assess the amount of work they have done so far to fulfil the promises." So went a news story in Times of India dated 22 October 2014.

The God know whether Finance Minister Arun Jaitley reads the BJP's Lok Sabha Manifesto (LSM) daily. In all probability, he either did not read LSM before crafting his ‘Transform India' budget for 2016-17 or chose discretion over political dharma.

Had he read LSM time and gain, had he read BJP's previous LS manifestos, had he read NDA-I's unfulfilled promises, he would not have designed his "transformative agenda with nine distinct pillars." He would have used more pillars- may be increased their number to a dozen if not two dozen. LSP is full of growth pillars. Mr. Jaitley would hopefully locate more pillars to give wholesomeness to transform agenda in the budget for 2017-18.

A durable and elegant house should, however, always be erected on even number of pillars. The #OddEven virus of his bête noire Arvind Kejriwal perhaps entered Mr. Jaitley's laptop and left the budget short of one pillar!

Striking a serious chord, one can say that Mr. Jaitley should have added 10th pillar to ‘Transform Agenda'. And this crucial pillar is: Providing safety to citizens including investors. The crying need of the hour is to restore citizens' faith and fear in illusive rule of the law.

He could have elaborated this idea by belatedly voicing Government's resolve against the burning and looting of houses, shops, malls and hotels of innocent citizens in Haryana by Jat OBC quota agitators. He should have reinforced his stance by recalling the recent horror wrecked on rail passengers. Kapu OBC quota fighters pelted stones on the train and burnt it in Andhra Pradesh.

Be it Patel jobs stir, be it sub-standard cotton pesticides scam in Punjab, be it any minor tragedy such as a person gone missing, the brunt is brone by innocent citizens and economy. Rasta roko, rail roko and chaka jam have become the mantras of the right to protest. Damage to public and private property has become de facto extension of the freedom of expression!

Someone here might well wonder what all this sob story has to do with the budget. The answer is simple: The budget helps create an environment in which entrepreneurs feel safe and secure to make investments. Thus, without police empowerment and with restoration of rule of the law, Start-up India, Stand-Up India, Make in India, etc would remain lame ducks. Moreover, lawlessness increases the expenditure on internal security. If citizens follow duties enshrined in the Constitution, the money from internal security can be diverted to efforts to generate jobs, wealth and taxes.

Haryana tragedy is similar to Kutch earthquake. In the latter case, the then Finance Minister Yashwant Sinha, in his budget speech for 2001-02, had levied an additional surcharge on income tax to shore up National Calamity Contingency Fund (NCCF) for providing adequate funds for quake relief.

While considering amendments to budget proposals, Mr. Jaitley should thus unveil a road map for scheme for expansion and modernization of central and state police. The scheme should provide for setting up of CCTV networks in public places. It should also stipulate fast-track prosecution of rioters, who are no less than terrorists . Mr. Jaitley could have at least announced a riots insurance scheme and some central compensation for riot victims. As India is a managed anarchy, it would be appropriate for Mr. Jaitley to create national riots contingency fund (NRCF) on the lines of NCCF. The Centre can't turn blind eye to plight of citizens by saying that law and order is a state subject.

Coming to fiscal domain, a budget analyst might give leeway to Finance Minister for his oversight of anti-cess, anti-surcharge recommendations and other fiscal prudence given by successive Finance Commissions, Commission on Centre-State Relations (CCSR) and other similar entities.

They, however, can't let him get away with amnesia about what he stated about UPA budgets as the Leader of the Opposition in Rajya Sabha. He owes a credible explanation to the nation for his failure to practice what he preached from the Opposition benches.

Take a look at what he said while initiating discussion on 2012-13 Budget in Rajya Sabha on 26th March 2012. Mr. Jaitley observed: "we have now created a system in India, where every possible activity that I undertake, the taxman has decided to put a tax on it, making us one of the highest tax societies once again. So, that entire rationalization, which we thought was coming post-1991 because of the kind of difficulties we are in, now seems to be given a go-by."

He continued: " if you take a piece of paper or the back of an envelope and start calculating – the Finance Minister with the infrastructure available in the Revenue Department will know better – you will find that it is not merely the 30 per cent odd taxes or the 2 per cent educational cess that you have to pay. But for an earning person, the entire tax burden, taken directly or indirectly, could be anything between 50-60 per cent of what he earns, and for the aam aadmi, who may not be earning enough to pay income tax, this entire burden of the new-age taxes, which you are imposing, will also be on him because he also hires services; he also uses the roads; he also aspires to build a house; he also intends to buy a vehicle; he also needs service of various forms."

He aptly told the then Finance Minister Pranab Mukherjee to rein in service tax: "You are taxing every activity 365 days 24×7 – from what I earn to what I spend to what I eat to what I wear to where I live and to where I drive – twelve per cent is excessive. You have brought in all services. Therefore, the Finance Minister should seriously reconsider it. This will have an inflationary burden."

Far from making paying taxes easier and lighter, Jaitley is now following the path laid by Mr. Mukherjee and his other predecessors.

Instead of reducing service tax, Mr. Jaitley has slapped Krishi Kalyan Cess @ 0.5% on all taxable services ostensibly to fund schemes for agricultural development and farmers' welfare.

When it comes addressing agrarian crisis including farmers' suicide, the Centre washes its hands off the issue by stating that it agriculture is a State subject. The stock reply given by Government in Parliament, both during UPA & NDA regimes, reads as: "Agriculture is a state subject under the Constitution and therefore, States are primarily responsible for development of agriculture sector and welfare of farmers including payment of compensation to the victims of suicides."

The logical extension of this contention would be that the States have an exclusive right over the proceeds of KKC and the Centre should merely act as cess collector.

Any additional impost under whatever garb and in whatever form helps Finance mobilize more resources. The additional availability of funds collected for any specific purpose thus helps the Government manage its fiscal deficit at the expense of States.

He had last year imposed Swachh Bharat Cess @0.5% on service tax. He easily forgot what he once said on this issue while bemoaning UPA's ubiquitous taxation of all services. As Leader of the Opposition in Rajya Sabha, he cribbed: " Sir, I am a morning walker. I may get of the Lodhi Garden soon..... We have a sulabh sochalya there. From the 1st of April, we will have to pay taxes every time we go in. That is the width of taxes that you have imposed now...."

Any citizen except VIPs who live in colonial era legacy called Lutyen's Delhi can give any number of instances to show that this cess has had no impact on cleanliness. His or her locality continues to stink and litter is as ubiquitous as ever in public places.

Yet another new cess imposed by Mr. Jaitley is infrastructure cess. It is to be levied as 1% on small cars, 2.5% on diesel cars of certain capacity and 4% on other higher engine capacity vehicles and sports utility vehicles (SUVs). The purpose of this levy is contain manage "pollution and traffic situation in Indian cities."

Mr. Jaitley perhaps can recollect that another sage lawyer-cum-finance minister P. Chidambaram had imposed an infrastructure impost in the nineties. In his so-called dream budget for 1996-97 (a nightmare in effect), Mr. P. Chidambaram stated: "I have to raise resources to meet these requirements. I intend to ask importers to share the burden of building the infrastructure in this country because, ultimately, it will help raise production and enhance competitiveness. I, therefore, propose a levy of 2% as special customs duty on all imports except...."

Mr. Jaitley would also know that certain States also levy infrastructure cess. Punjab Infrastructure Development Board, for instance, collects 3% infrastructure development cess on foodgrain procured by different entities.

The country is already awash with infrastructure cess that goes by different names . Certain airports collect this cess as airport development fee from air travellers.

Road cess on petrol and diesel running into thousands of crore of rupees has been collected every year since 2000. This is in addition to one-time road tax collected by States at the time of purchase of a vehicle. After paying multiple levies for road development, citizens are forced to cough toll charges on many roads to developers as recovery of cost of road development!

FM should spare time some day to fathom the tax jungle raj by flipping through Planning Commission-sponsored 2010 study titled ‘Road User Taxes in India -Issues in Tax Policy and Governance'

Economic mobility & quest for economic efficiency has indeed become a de facto crime in India. This belief got reinforced last year when Supreme Court imposed hefty environment compensation charge (ECC) on commercial vehicles passing through Delhi. ECC is in addition to environment cess that Delhi Government has been levying on diesel sale since 2009 ostensibly for improving air ambience.

That Mr. Jaitley's budget is cast in pre-1991 mindset is also evident from the decision to double the new-age tax called clean energy cess to Rs 400 per tonne of coal and rename it as clean environment cess.

This impost made a humble entry in India's complicated tax web in 2010 with a rate of Rs 50 per tonne. This cess needs to be scrapped straightaway for two reasons. First, the Government has been tightening the boilers and other coal-processing equipment norms as well as specifications for coal over the years. This means the industry is already bearing a higher fixed and operating cost (deemed green expenditure) for generation of powers and for manufacturing all products.

Second, this fast snowballing cess is crowding out or minimizing the scope for increase in royalty on coal that accrues to States.

Coal has already been subjected too many cess by States – an issue X-rayed in study captioned ‘Economic and Fiscal Impact of Royalty Rates of Coal and Lignite in India' published by Institute for Social and Economic Change in 2003.

Mr. Jaitley has acted like most of his predecessors, who resorted to all sort of emotional blackmailing of taxpayers to impose surcharge on both direct and indirect taxes.

The pre-1991 mindset is reflected in Mr. Jaitley's move to raise the surcharge from 12% to 15% for taxpayers with income of above Rs 1 crore. He should have either merged with basic tax/tariff the relevant surcharge in all cases or scrapped them to demonstrate his commitment to simplifying taxes.

Surcharges and cess make tax structure complicated. They increase both the cost of administration and compliance. They hardly make any impact on the problem for whose solution they are collected. This is because they are either diverted or misused or simply keep accumulating in specific accounts.

Did employment surcharge on income tax levied in late eighties reduced unemployment? Has the quality and maintenance of road improved due to multiple cess and tax for road development? Has the oil cess levied since 1974 resulted in reduction in import of oil & gas? Has the education cess led to enrolment of street children in schools?

Consider now Jaitley's claim about quality of fiscal deficit management. This largely rests on unprecedented hikes in excise on petrol and diesel. The total excise receipts including road cess on petrol and diesel & surcharge on petrol increased by a whopping by Rs 92205.76 crore (59.10%) to revised estimate of Rs 248210 crore for 2015-16 from Rs 156004.27 crore in 2014-15.

This mop-up is likely depriving the nation of an opportunity to enhance its economic efficiency & economic mobility to foot the wage increase for central government employees, who constitute an island of prosperity. The quality of fiscal accounting can be judged by factoring in the roll-over of unpaid fertilizer subsidy of over Rs 40,000 crore to next year.

To get the quality and credibility certificate on fiscal front, Mr. Jaitely should set up an independent fiscal health monitoring council and wait for its periodic reports. And before that, he should explain why he has not acted on the recommendations of Expenditure Management Commission (EMC), which submitted its interim report in January 2015 and should have submit its final report much before the latest budget.

The failure to make public EMC reports is itself a certificate on quality of fiscal consolidation!