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G. Srinivasan

THE country has been living with high and persistent fiscal and revenue deficits for far too long, and this will affect the macroeconomic environment through inadequate investments for industrial revival and infrastructure development in the coming years, says the National Institute of Public Finance and Policy Director, Mr M. Govinda Rao.

According to Mr Rao, the country has not had a serious balance of payments problem largely because capital account convertibility has not been introduced. But the persisting fiscal imbalance has impacted savings and investments as also the economy in the form of reduced growth rate. The economy has failed to grow to its potential because of the high fiscal deficit.

Though there are some "positives", such as high foreign exchange reserves and a reasonably comfortable foodgrains stock to ensure that the prices do not escalate even in the worst drought year, Mr Rao avers thus: "One should be careful not to be complacent about the positives mainly because if there is capital account convertibility and no capital control, it does not take much time to wipe out the entire foreign exchange reserves."

Stating that the central issue for the Finance Minister, Mr Jaswant Singh, is to bring about fiscal consolidation, Mr Rao feels that even as the fiscal deficit needs to be reined in, there is the inevitable need to improve both infrastructure and the industrial climate and revive the sagging economy.

On the expenditure front, Mr Rao feels that lower interest rates and the swapping of high interest loans with low interest ones could reduce the interest burden, but the total volume of borrowing for own investments as well as for lending to States has been growing steadily. The crucial issue continues to be "incapacity of the Government to enhance allocative and technical efficiency of public spending. Unproductive spending continues to crowd out productive expenditure."

Fiscal consolidation, Mr Rao says, would not be achieved unless there is a marked increase in the tax-GDP ratio, which has declined by almost one percentage point during the last decade. While the Kelkar Task Force report has made a number of useful and implementable recommendations on both direct and indirect taxes, Mr Rao feels that "the proposals on getting rid of all exemptions, savings incentives and housing incentives are extremely important." The extant tax saving schemes "erode the tax base, do not push up the savings rate and, more important, distort the choice between different saving instruments."

Stating that it is better to avoid these tax preferences and have lower rates instead, Mr Rao underscored the need to increase the tax relief to cover savings up to Rs 50,000 in long-term instruments such as pension funds and life insurance. Also, he is not for totally exempting dividends from tax. The justification for exempting dividends is that, when corporate tax rates are brought on a par with the highest marginal personal income-tax rate and when all tax preferences are removed, taxing dividends results in double taxation. "The truth is that even if the tax rates are so aligned, it would be impossible to remove all tax preferences and, therefore, significant differences between statutory and effective tax rates will continue," Mr Rao said, adding that "it is necessary to tax dividends, by including 50 per cent in the total income of the taxpayers, as in Germany."

Referring to corporate tax and on the depreciation rate to be allowed, Mr Rao feels it is not advisable to alter the depreciation rates nor align the income-tax and company law rules.

On the controversial issue of taxing agricultural income, Mr Rao clarified that Kelkar panel has not, per se, proposed agricultural income-tax, but only taxing those who declare substantial incomes from agriculture — one of the easiest ways to evade tax and convert black money into white — in their returns. The amount so evaded is estimated at over Rs 1,000 crore. The proposal, therefore, is to have a tax rental arrangement with States, collect tax on these declared incomes and pass on the revenue to the States. This measure, Mr Rao feels, would "augment revenue, improve horizontal equity and counter tax evasion."

On service tax, Mr Rao says that the Kelkar Committee has closely followed the recommendations of the Expert Group on service taxation headed by him. One of the major proposals is that the tax should be general, not selective. The difficulty of having selective service tax is that each service will have to be defined, which would create interpretational problems. Service tax is important because the extant excise (Cenvat) is being converted into manufacturing VAT.

The other key recommendation is that the tax should be made concurrent, that is, where both the Centre and the States can levy the same. Mr Rao deplores that much of the proposed VAT levy is shrouded in secrecy and, as such, the time was ripe to lay out the roadmap for achieving full-fledged VAT.

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