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Tax buoyancy and fiscal challenges

High economic growth rates have resulted in tax buoyancy, giving Finance Minister P. Chidambaram additional leeway in preparing the Union budget for 2007-08. Government finances have been improving with each quarter this year, the second and third quarters ending with a gross fiscal surplus. The upshot has been a dramatic reduction in the rate of increase of the widely watched gross fiscal deficit. On a cumulative basis, at the end of the first nine months, the gross fiscal deficit at Rs.94,584 crore has been 12.44 per cent lower than last year. That is a remarkable turnround, considering that in the first two months the Government had incurred nearly 50 per cent of the gross fiscal deficit it had budgeted for the whole year. The budgetary goal of containing fiscal deficit within 3.8 per cent of the GDP seems achievable. As a proportion of a larger GDP the deficit is bound to come down. An improved tax collection machinery has reinforced the positive trends.

During the first nine months, tax collections increased by 37 per cent to Rs.232,171 crore. Almost 71 per cent of the budgeted net tax revenue has been realised during the period. Gross corporate tax collections rose by a robust 55.2 per cent, fully corroborating the impressive performance of the corporate sector. Income tax collections have gone up by 27 per cent. Not only is there better compliance but rising incomes have brought more people into the tax net. Customs duties have risen by nearly 33 per cent. That was primarily attributable to the higher global oil prices during the early part of this year. While service tax collections have gone up by 64 per cent, it is the meagre growth in excise duty collections — just 7 per cent during the first nine months — that is surprising. Recent economic growth has been underpinned by a strong manufacturing sector, whose output should have boosted excise collections. Aggregate government expenditure has grown at a slower pace of 15.4 per cent but quite disturbingly non-plan expenditure has been racing ahead of targets. The Government would seem to have kept only plan expenditure on a leash. Ominously, ministries such as agriculture and those dealing with infrastructure projects have fallen short of their expenditure targets. Among the major challenges before the Government is not only to earmark, in the budget, large sums for the thrust areas but also to ensure that they are really spent, and purposefully so. The reasonably healthy state of government finances might give the Finance Minister sufficient room to embark on major tax reform such as rationalising the numerous exemptions and taking the first steps towards a uniform goods and services tax combining elements of excise and sales taxes.

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