Download Can the Government with its strong mandate, finally address two

Can the Government with its strong mandate, finally address two critical
areas in this budget and set us firmly on the path of Equity in taxation &
Efficiency in developmental expenditure, to create some room for growth
without the shackles of fiscal deficit henceforth?
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As we enter an era of more transparency, higher efficiency and more accountability, can
we finally move to broaden the tax net?

Why does a farmer earning 25 lacs a year pay no tax, whereas the average salaried
employee pays tax even at 5 lacs of annual income?
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At per capita direct tax revenue of less than Rs 5000/annum, how can the Government
drive a developmental / investment agenda and lift the vast population to a better life?
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And how do we explain being at the bottom of even the EM nations on Social Indicators,
when up to two thirds of our revenue expenditure has been going in non-plan expenditure
for decades together?
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Can we finally focus on “teaching to fish” rather than “feeding a fish”?
Direct Taxes: Desperately in need of a sensible direction
Per capita direct tax revenue for the US works out to nearly USD 10,000 USD during the year.
This accounts for nearly 20% of the per capita GDP for the country at about USD 50,000 per
annum. That’s a pretty efficient Government machinery considering that taxes are paid only by
the working age / earning population. Per capita direct tax revenue for Germany too works out
to a significant USD 12,000 or so, accounting for 26% of its per capita GDP. Contrast that
with India, where per capita direct tax revenue works out to a paltry USD 80 or
INR 5000. As a proportion of per capita GDP, this is just about 5% of per capita
GDP of USD 1500 or just under INR 1 lakh!
While Indian tax revenues account for a significant portion of Government revenues (50%+),
much of this comes from indirect taxes. Direct taxes account for just about 20% of total tax
revenues for India. This is in sharp contrast with the developed countries such as the US and
Japan, where direct taxes makes up most of the tax revenues at about 70-75%. This is
understandable as in developing economies, governments are known to rely more on indirect
taxes that enhance tax efficiency as they hit a broader base and result in lower tax evasion. More
importantly, raising direct taxes can be politically suicidal in a democratic, multi-party system
like India where for better part of the modern times, Governments have had to govern keeping
the delicate balance of coalition politics in mind. It may in fact be argued that significant
reliance on indirect taxes imposes a relatively bigger burden on the poor or economically
disadvantaged, as they devote a higher share of their incremental income to consumption,
adversely affecting demand and overall growth in the economy.
Coming back to India’s ratio of direct taxes to GDP, at 5%, it compares poorly even with other
emerging economies such as Mexico, where the ratio is nearly 10%. Per capita GDP in Mexico at
nearly USD 10,000, is ~6 times that of India, while its per capita tax revenue at almost USD
900, is more than 10 times that of India’s. Even closer home, another developing Asian
economy, Indonesia fares better with direct tax to GDP ratio of 7%, depicting much higher
efficiency in the ability of Government to impose & collect reasonable taxes. While the
inefficiency of the tax machinery in India is well known, this highlights the significant inequities
in the direct taxation structure, manifested in large swathes of Indian population (e.g.
agricultural income, self-employed professionals, small businessmen) either fully escaping or
largely evading direct taxes despite having high incomes. Some of these age-old exemptions are
now completely irrelevant in modern times and it’s high time we addressed these.
The Government may well introduce a tax structure that applies to these largely
exempt sections of population and start a healthy trend in people beginning to
pay for services, much like any average, salaried individual pays! The fact that in
a country of 1.2 billion, of whom at least 267 million are considered to be in the
middle class, less than 3% of the population files income tax return as assesses,
underscoring the injustice that an honest taxpayer has been subjected to.
A Troubling Paradox: High Non-plan Expenditure, but Low Social Spending
A second pressing matter is the issue of high non-plan expenditure which has proved to be
largely unproductive, as India occupies an unenviable 135th position out of 187 nations in the
Human Development Index (2014). We rank lower than even fellow Asian nations such as Sri
Lanka and Maldives, and enjoy the company of African nations such as Ghana who is at 138th
position.
Over the last two decades, irrespective of the political dispensation, India has been burdened
with alarmingly high levels of non-plan expenditure. Non-plan expenditure has accounted for
nearly 60% of the total revenue expenditure since 1990-91. Most of the non-plan or
‘unproductive’ expenditure is attributed to high interest outgo (20-25% of total revenue
expenditure) amid heavy government borrowing and a ballooning subsidy burden on items like
food, fuel, and fertilizer, clearly dragging down the country’s public finances.
Although, there is no comparable number for the developed world, since non-plan or nondevelopmental expenditure has been a concept unique to the Indian budget planning model, a
comparison on social spending parameter, when juxtaposed with high non-plan expenditure,
presents an interesting paradox.
A paltry 2.5% of the country’s Gross Domestic Product (GDP) in 2012, was devoted to social
expenditure. Even sub-Saharan Africa has historically reported higher social spending, in the
range of 4-6%, going up to 9% for middle-income countries in the African continent (IMF
Regional Outlook). On this crucial parameter, India fares poorly even among its BRIC peers with
social spending in Brazil, South Africa and China at 15%, 9% and 7%, respectively. Compared to
OECD, which makes up many of the world’s richest nations, this proportion increases to more
than 20% of its annual gross domestic product.
Clearly, India needs to rationalize its flawed subsidy system, cut down on wasteful subsidies and
allow a diversion of funds towards more productive resources such as education and healthcare
sectors which can enhance the productivity of the economy.
Will Budget 2015 embrace these lessons and reset the clock?