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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? 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? 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? 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? 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?