“Everyone is entitled to his own opinions, but not to his own facts” – Late U.S. Senator Daniel Patrick Moynihan
Yoga is the science of preparing the mind and body to reach the “ultimate truth”. It may be God or probably any other thing but the idea is that man’s eternal quest for the ultimate being or thing will end there. The mooting of the idea of Banking Transaction Tax (BTT) by Baba Ramdev and seeing the fate of his earlier war against black money which ended with a whimper, betrays the trust of the people in the Baba as a Yogic master who will lead them to redemption.
The point Babaji is missing is that, this world is nothing but Maya (illusion), in view of the spiritual tradition to which he belongs to. And his venturing into this illusionary world will take him away from his yogic quest. So, if Babaji focuses more on the spiritual and physical emancipation of the mankind and leave such superficial things like taxation et al. to the mere mortals. Then the nation will have the material prosperity and spiritual peace. In certain definitive sense, taxation is also a means of redistribution of wealth created in an economy with its ultimate objective, which in terms of ‘yogic’ metaphor, is the improvement in the quality of life of the people.
And it holds truer for a country like ours which seeks to build an equitable and inclusive society. The best testimony of our national commitment to the cause of building a just society is reflected by the use of ‘Socialist’ in our Constitution’s Preamble, though frowned upon by many nowadays. So, If I continue with the proposition ‘taxation in a certain sense help in redistribution of wealth in an economy’ then it will hold true that the more efficient and the more transparent a system of taxation is the more equitable and inclusive a nation would be. Provided the money is spent prudently for the betterment of the people. In other words, it can be said that prudent and efficient tax policy is of critical importance to retain its competitiveness and address the concerns of income inequality as well. And such a system would be better served if it has economic efficiency, equity, built-in revenue elasticity and systemictransparency built in into the system of taxation.
While Finance Minister P. Chidambaram does a difficult balancing act between prudent and populist to present his interim and the last budget of UPA II, we would like to muse on the issues faced by the tax system in India; the causes for those issues; how the system would be reformed; what are the proposals for reforming the tax system and what are the timelines we must keep in mind that are their to seem them as a reality
When Moody’s Investors Service recently warned about the potential weakening of the country’s sovereign credit profile, such threat as per the rating agency is due to the combination of economic recession and high inflation which will increasingly diminish our financial system’s ability to absorb govt.’s debt. I was immediately reminded of the rationale for the Fiscal Responsibility and Budget Management Act, 2003 (FRBMA).
And as one thing leads to another, thought of FRBMA led me to the Kelkar Committee’s observation on the positive impact of the Act on India’s fiscal health and the resultant impact on other economic variables that: “The fiscal improvement from FY 2002-03 to 2007-08 saw a rise inforeign reserves providing unprecedented import cover and global confidence… This fiscal discipline fed into other economic variables in a positive manner. The aggregate disbursements of the central and state governments showed an increase in capital outlays from 11.87 percent in 2002- 03 to 18.59 percent 2007-08 (as percentage of aggregate disbursements). The lowering of the government’s fiscal deficit (GFD) was accompanied by a benign inflationary environment, lower real interest rates and significant increase in private sector investment.” The Committee had submitted its report on the ‘ROADMAP FOR FISCAL CONSOLIDATION’ in September 2012. The mandate of the committee included introducing mid-term corrections in the current fiscal year 2012-13 and to chart a medium term framework on this basis, for the remaining time horizon of the Thirteenth Finance Commission.
While recommending a slew of policy measures to keep the country in the pink of fiscal health, the Committee had argued that “High fiscal deficits tend to heighten inflation, reduce room for monetary policy stimulus, increase the risk of external sector imbalances and dampen private investment, growth and employment.” And it had observed that if quick and credible measures are not taken in that regard then
There may be a sovereign credit downgrade which will result in the flight of foreign capital. It had further argued that such a situation will further weaken the rupee and negatively impact the capital markets and the banking sector. And this will leave little head room for counter-cyclical policy measures in the event of another global crisis, it argued. The burgeoning fiscal deficit will leave “limited monetary space for lowering interest rates to stimulate private investment and growth.” And the socio-economic and political impact of such a vicious cycle will be felt in terms of economic inefficiency, social inequality and potential for political dystopia in the nation.
The best antidote for the above fears of such socio-economic and political disaster is the bolstering of economic competitiveness and keeping income inequality and that can be done apart from other things through bringing in efficient tax system. The Kelkar Committee, amongst its various policy level suggestions whilelaying the roadmap for the fiscal consolidation in a medium term perspective, recommended the following steps for having an effective taxation system.
The Direct Taxes Code Bill, 2010, should be comprehensively reviewed before it is enacted into law for implementation because it will lead to considerable unacceptable losses on a continuing basis. Given the low tax-GDP ratio and the existing fiscal crisis, there is absolutely no fiscal space for such large revenue loss.
Effective detection and penalization of noncompliance on the one hand and providing quality taxpayer services to promote voluntary compliance is at the core of Reforming Tax Administration. The Committee believed that the department is unable to harness the large volume of information collected by it since it lacks data mining skills. And Taxpayers have found new methods and avenues for parking there undisclosed income to escape detection. Despite the tax department being better equipped now, to detect noncompliance with the help of systems like TDS, advance tax and self-assessment tax as the reporting system (both by third parties and self) is largely computerized. Yet there are gaps in the administrative procedure for collection and reporting of TDS which undermines the efficiency of the tax administration both in terms of enforcement and taxpayers’ services. So in order to deal with such non compliance and the probability thereof the Committee recommended the following:
Babji sought replacement of all taxes except import duty with a banking transaction tax that would be levied on all transactions received into bank accounts at rates varying between 0.10 per cent and 30 per cent. He further proposed differing tax slabs for various industries such as textiles, FMCG, oil and liquor.
According to Ila Patnaik, RBI Chair Professor at the NIPFP, Delhi, it is not a good idea. In her column in The Indian Express, she argued: “It is well understood that when the government starts taxing certain kinds of transactions, people move away from them towards other kinds of transactions. If one method of making payments involves being taxed, people will choose other methods. Transactions on the street will shift to dollars, gold, bitcoins and other unexpected things. This would result in the further decline of the Indian rupee as a trusted vehicle for the storage and transportation of value. She further argued that “Commentators have highlighted that the international experience of transaction taxes shows that they do not support revenue collection of more than 2 per cent of the GDP, and even this declines over time.”
The two biggest legislative reforms related to taxation i.e., Direct Tax Code and Goods and Services Tax are not in view in near future and if media reports are to be believed that may not happen before 2016. Further with the Setting up of Tax Administration Reform Commission under Dr. Parthasarathy Shome on 26.08.2013, the government has made its intent clear on comprehensively reforming the system. Yet when it all sees the light of the day is a pertinent question which only time can respond to. That too, when due to globalization it is increasingly a Competitive Global Economic world over which most urgently required implementation of India’s Tax Reforms Agenda minus Babaji’s not so Yogic Chants. However, it will also serve great purpose if we remember the wise words from experts that there is a limit to what tax reform can accomplish as the benefits from tax expenditures are not equally shared and deficit-financed tax cuts do not spur economic growth in the long run.
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