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No case for tax cuts

According to the latest government data, during the first nine months of 2007-08 there has been a phenomenal 50 per cent growth in the collections of personal income tax and 39.84 per cent in corporate tax collections. Together these two direct taxes are expected to cross Rs.3,00,000 crore, comfortably exceeding the budgetary target of Rs.2,67,400 crore. Direct taxes will surpass indirect taxes in their contribution to the exchequer. That again is a welcome development bringing India on a par with mature economies. A graded personal income tax of the type that exists in India and many other countries is based on the salutary principle of ability to pay. The record tax collections are no doubt a beneficial consequence of the high economic growth seen recently. The GDP growth rate is once again expected to top 9 per cent this year and, if the Planning Commission’s estimates hold good, that level will be sustained over the Eleventh Plan. However, among indirect taxes, the growth in excise duties has not been commensurate with economic growth. Customs and service tax collections are expected to make up for the shortfall. Finance Minister P. Chidambaram has claimed that the tax-GDP ratio target of 11.8 per cent, set in the budget, will be achieved. Promising a more tax-friendly environment in the income tax department, he has stressed voluntary compliance on the part of tax payers as the optimal way to maximise tax collections.

While the fiscal situation is comfortable, there is no case at all for reducing the income tax rates, a clamour that will become strident on the eve of the budget. The marginal tax rates in India compare favourably with those obtaining in many developed countries, including the United States, the United Kingdom, and Australia. It would also be facile to assume that the tax-GDP ratio can always be maintained at the current level. There is obviously a case for widening the tax net, which despite some improvement, is still abysmally narrow. Agriculture, which accounts for 19 per cent of the GDP, is not taxed at all. The number of income tax payers continues to be small, with a majority claiming incomes of Rs.2 lakh and less. An even more ridiculously smaller number report incomes of Rs.10 lakh and more. At this juncture, the overriding concern of the Finance Minister should be to ensure that money is found for the massive outlays needed for the social sectors, education, healthcare, and agriculture. These sectors have been earmarked almost 75 per cent of the total expenditure envisaged in the Eleventh Plan, compared to 55 per cent in the Tenth Plan.

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