• PAGE ONE
• INDEX
• HOME

Options before Mr. Sinha

P. R. Brahmananda discusses some of the tax initiatives that the Finance Minister can exercise in the coming Budget to enhance the Centre's resources.

THE Budget is less than three days ahead. The Prime Minister, earlier, and the President, on February 23, gave sufficient indications and hints that the Budget has to face up to the economic, especially fiscal, challenges before the country. The Presiden t, in his speech, succinctly explained the rationale for reducing the fiscal deficit. He also expressed the need to raise the tax-GDP ratio and to cut down expenditure and subsidies.

Unfortunately, in the media and especially on the small screen, the discussions have not covered the requirement of raising the tax-GDP ratio through an increase in tax rates and through extending the scope of the existing taxes. It seems the impression is being given that the Finance Minister, Mr. Yashwant Sinha, can at best extend the services tax and would not be willing to raise the personal income-tax rates and to do away with a large number of concessions and reliefs.

One wishes there was sufficient discussion on why, for example, the standard deduction, which primarily the salary-earners and mostly government and public sector employees enjoy, should not be substantially reduced, if not done away with. Some people ar e even demanding that the exemption limit be raised to Rs. 1 lakh.

According to recent statistics, the proportion of employees with an income of more than a lakh of rupees per annum is more than 10 per cent. In fact, 15 per cent of employees have a share in aggregate incomes of more than 30 per cent. A fair portion of t hem are government employees and staff of public sector and corporate sector organisations. This section can easily bear an incremental tax rate of 35-40 per cent above the income of Rs. 3 lakhs. Should these sections not share the general burden, instea d of passing it on to the poorest sections? What is the rationale in giving the benefit of standard deduction? Can this be justified on the ground of equity and progressiveness?

There are reports that recently, the proportion of people below the poverty line has risen to about 40 per cent. It is also reported that the employment situation, especially in the urban areas, has worsened. In this context, some reduction in the person al disposable incomes of the upper echelons of the middle-classes should not be objected to. In fact, this should be boldly discussed in the media. It is surprising that even the economists of the ruling party want to assure that there will be no rise in the tax rates.

The Finance Commission award will imply the need for more of transfers to the State governments to implement the Fifth Pay Commission's proposals. The Central Government's kitty of resources will have to be raised substantially if additional demands for Defence and other contingencies arise. With more than two crores of earners filing their returns, the Finance Minister can exercise new initiatives. Some minimum presumptive tax, as suggested by Professor Karnik, could be levied on all those who file nil taxable income returns.

I have another suggestion. According to the RBI study on State finances, the aggregate collections through profession tax is placed at about Rs. 1,330 crores. Even assuming that an average of Rs. 500 is paid by each person, all over the country about 2.6 crores of persons must be paying the profession tax. At present, the tax paid on this score is exempt from income-tax. There is no rationale for this exemption. It is not proper to treat the personal income-tax and profession tax as the same tax. The ex emption can be removed. The Finance Minister could easily collect Rs. 1,500 crores for the next year by this step.

The Finance Minister's Deputy, Mr. Dhananjay Kumar, has referred to the need for a general services tax. This should be considered seriously. Items such as railway reservations could be brought under its purview. There are numerous such services rendered by the government/public sector organisations, which could also be brought under its purview.

Among the items that could come under the purview of a general services tax are: Banks' services to customers based on bank accounts of current and savings deposits; shops and stores which market goods to the consumers; computer and Internet services, in cluding cyber services; entertainment in hotels and restaurants; legal and medical practitioners' services; all intermediate services in financing, stock-broking etc.

It also includes petrol bunks; STD and other services; news agencies; real estate and business services; photo studios; fashion shows; pawn brokers; money-lenders and jewellery dealers; tourist and travel agencies; tutorials; nursing homes; private hospi tals; beauty parlours and saloons; boutiques; security agencies and detectives; tax consultants; notaries; certifying agencies; private schools and colleges/training institutions; labour contractors; borewell agencies, and so on.

A general services tax on turnovers above Rs. 5 lakhs could be levied with some exemptions. I would suggest a modest half a per cent levy or a minimum service tax of Rs. 1,000 per annum. The self-assessment system should be employed widely for this purpo se.

Since in economics, the government is treated as a service, and every employee directly or indirectly is rendering a service to the public, the minimum services tax could easily be levied on all government and quasi-government employees, including minist ers, if the suggestion of reduction of standard deduction is not welcome. (Some years ago, the Shankar Acharya panel seems to have mentioned 10 per cent of all government expenditure as a mark-up, probably by employees, as black payments.). The President rightly spoke of the need for general austerity. There is scope for several perks to be withdrawn.

Administrative prices should be such as to recover costs in the minimum. Can Mr. Sinha not consider a surcharge through an ordinance on user charges by State government-run utilities? He could transfer the net collections to the State governments pro rat a. State governments find it difficult to levy full user charges because of political opposition. The Central Government could take the initiative. If the Finance Minister observes equity by a full-scale coverage of all sectors and people in his tax prop osals, he would not be accused of inequity or bias.

Government expenditure will have to be pruned. There is one lacuna in the scheme of voluntary retirement. The problem is the fear of inflation, which is not groundless. Added to this is the prospect of reduction in interest rates. Naturally, the amounts the retiring employees collect will fall in real value, and so will the earnings flow. This is the reason why on re-invested savings by retiring employees, higher rates of interest will have to be offered as an inducement. This will popularise the golden handshake proposals.

The best austerity programme is to promote savings. This is an aspect to which the Finance Minister has not paid much attention. Any rise in direct tax rates, if coupled with exemption for savings, would be welcomed. I do not know why there is so much al lergy to savings promotion on the part of this Government. I hope Mr. Sinha will change this attitude.

The President and the Prime Minister have created a right environment for a historic Budget, which can get rid of the revenue deficit if the Finance Minister is willing and permitted to do so. Non-populist measures are needed now more than ever before. W ill the Finance Minister rise to the occasion?