From
the ‘grand plan’ of 2001, to this year’s ‘disappointment’ was a long
journey, mostly a difficult one. This Union Budget has happened in tough times:
recession, defense costs, a year of calamities, the fallout of 9/11. Given this,
the overall direction of the Union Budget is not a bad one.
The best thing I can say about it is that it steps a bit away from populism.
From the Railway Budget’s reduction of cross-subsidies, to the Union Budget’s
rationalization of petrol and cooking gas prices. Good, especially if the
government can hold its own in the face of the likely backlash ahead.
But the tax-the-rich idea is also populism. The ‘rich’ include the
successful–software exporters. Going back on commitments of a ten-year tax
holiday, there’s a ‘temporary’ tax on 10% of profits this year. Now, this
is no great tax burden, nor is it great profits, but it sends a signal: We can’t
fully trust the government. We can’t make plans, projections or valuations
based on their promises. Who knows how temporary this will be? That it won’t
be 30% next year after a border skirmish?
There are positive steps. Manufacturing becomes more viable, the inverted
tariff structure goes away and the zero-duty regime gets pushed back to 2005.
But prices won’t fall. Mobile handsets get a bit cheaper, but over
three-fourths of all those colorful handsets will remain gray.
Part two of the tax-the-rich idea is an old refrain: a taxpayer in hand is
worth ten in the bush. Squeeze him! This Budget does. Thanks to its inability to
increase the tax base, the ITO squeezes more and more from hapless salaried
citizens who declare taxes and file returns, while leaving out 98% of the
population. Yes, the modern world–from the US to China–picks up much more of
its income from taxes than India does. But by moderately taxing most of its
citizens. Not by squeezing the honest 2%.
If the ITO could increase its taxpayer base by 2 percentage points more, it
could double its income tax collections. That’s easier said than done, thanks
to inadequate IT and other systems, and poor standardization or access to the
databases of other departments. It’s an uphill task to implement their theory
mandating tax returns from owners of credit cards, property, et al. (Yes,
listing phones in the ITO’s luxury hotlist is silly, but that’s another
story.)
An executive summary for the government: standardize your databases, share
them across your divisions, use IT effectively, and pick up people who should be
paying taxes. Treble the tax base this year. Match that with other reforms. You
can tax agriculture income a little, start charging a bit for electricity, plug
‘power distribution’ leaks and cut subsidies further. And you’ll take
bigger steps toward bridging the deficit than with fiscal gymnastics, or
penalizing salaried professionals for doing well in India.