AUGUST 16, 2009

By TIOL Edit Team

IT is globally believed by experts that the trend of revenue collections often mirrors the state of health of the economy. But the same may not be true for India! Why? A plausible reason lies in the history of target fixation by our political masters. India has unfortunately followed the tradition of planning its expenditure first and managing means for the same later. That is what led to the institutionalisation of this ill in our revenue collections. Undue pressure continues on the head of our field formations to collect more than what the growth in various sectors of the economy may yield for the exchequer.

However, going by the Budget Speech of the Finance Minister this year, we were made to believe that a sincere step has been taken by the Government to uproot this unhealthy tradition which compels revenue officials to flex their muscles towards the fiscal-end. The Finance Minister committed himself on the floor of the House on July 6 to stop this pernicious practice. He said, ¶We need a tax system which generates revenues on a sustained basis without use of coercive tax collection methods at the end of each year to meet targets.¶ This was indeed sensible cosidering the fact that GDP growth rate is expected to come down to 6% and that inflation is in the negative territory.

However, the FM seems to have lost confidence in his own pragmatism. At the annual meeting of the Chief Commissioners of Income Tax and DGITs, it is learnt that the FM has asked the administration to strive for a target of Rs 4,00,000 crores of direct taxes revenue. Even though this is not a budget document, this informal increase in target by another 8.10%, in effect means an increase of almost 16% overall over the RE of last year. This will take us back to the old malaise which the FM took pains to not only point out but also promised to root out in the course of the next four years.

Let's take a closer look at budget documents which do not contain the figures of actual collection for the Financial Year 2008-9. The actuals of the Financial year 2007-8 are, however, available. It is common knowledge that the estimate for 2008-9 were revised downwards considering the sudden global meltdown which affected the profitability of Indian taxpayers as well.

As compared to the Revised estimate(RE) of last year, the budget estimate for the current year shows total tax revenue at Rs 6,41,079 crores as against the RE of Rs 6,27,949 crores signifying an increase of only 13,130 crores. And, if one analyses the various heads seperately, it is seen that expected growth in customs duty is actually negative (-10,000 crores), excise duty (-1882 crores). Projected service tax colllection has been kept at the same figure of 65,000 crores ( despite addition of four new services to the tax net!).

Coming to direct taxes, taxes on income ( which includes STT, FBT and BCCT) has been pegged at Rs 1,12,850 crores as against RE of 1,22,600 crores showing a negative growth of 9750 crores; weath tax is expected to grow by 25 crores ( despite increase of exemption limit from Rs 15 lakhs to 30 laks!). Only corporation tax has been estimated to grow substantially by Rs 34,725 crores, an estimated increase of 15.64% over the RE. In short, only corporation tax was expected to grow at more than 15.5% and all other taxes were expected to decline or remain stagnant. Yet, apart from increase of MAT rate from 10% to 15%, there is no significant additional resource mobilisation in respect of corporation tax in the budget.

This is in sharp contrast to the BE for FY 2008-09. The BE for CorporationTax was slated to grow by 17.31%, IncomeTax by 17.5%, Customs by 14.2%, Excise by 11.5% and Service tax by a whopping 25.65%.

Fixing budget targets on the basis of such huge growth assumption, puts undue pressure on the tax administration. Unless the natural bouyancy of tax growth makes up for it, the tax administration has to resort to high handed means and unfair methods to artificially jack up the collection figures towards the end of the Financial year. Year after year, there are reports that the growth in collection in the first quarter is depressed due to huge outgo in the form of refunds.

Anyway, in a nutshell, the crux of the sudden change of FM's heart and mind is that the India Inc which appears to be making concerted efforts to limp back to normal growth track, is in for greater trouble in the coming months. Those of the taxmen who are mentally better tuned to resorting to high-handed methods have a good news as they need not adapt themselves to a new environment. Let's now wait for the CBEC meet of Chief Commissioners which is slated for the second week of Sepetmber and see what target is fixed for Central Excise, Customs and Service Tax.