‘It’ll be a Gam­ble to Slash Tax Rates’

The Economic Times - - Money -

In a chat with ET Now, Sa­jjid Chi­noy, Chief In­dia Economist, JPMor­gan, says there is not too much fis­cal space to cut tax rates, par­tic­u­larly if you worry about what hap­pens to tax col­lec­tions af­ter GST. Edited ex­cerpts:

Eco­nomic Sur­vey is talk­ing about re­duc­ing tax rates and stamp du­ties. Does the FM have el­bow room to re­duce tax rates? As far as in­di­rect taxes are con­cerned, they have lim­ited free­dom be­cause in three months’ time, this is go­ing to be re­placed by GST. I would still be cu­ri­ous to know if the sur­vey rec­om­mends that we op­ti­mise the GST de­sign and re­duce the num­ber of tax brack­ets. We have tried to in­crease the base a lit­tle bit more and im­prove the GST. But that is clearly a very im­por­tant re­form and I am glad the sur­vey is be­ing up­front about the fact. Let us not worry for near-term tax col­lec­tions; GST is truly a gamechang­ing in­sti­tu­tional re­form, which will more than make up through com­pli­ance and ef­fi­ciency gains down the line.

On di­rect taxes, all of us agree that the prob­lem in In­dia is there are too few in­di­vid­ual tax­pay­ers. Last year’s sur­vey said that only 4% of vot­ing In­di­ans pay taxes visà-vis an av­er­age of about 23% in our peer group. Now, a cou­ple of things are on that front; one is you are tempted to re­duce tax rates to try and im­prove com­pli­ance, but given all the other things, the growth next year is go­ing to be rel­a­tively soft and we do not have much con­fi­dence in tax buoy­ancy.

Num­ber two is: if oil prices stay at $55, it will still be 15% higher than this year’s av­er­age. That means we can­not get in­cre­men­tal oil tax rev­enues next year. Much of the tax buoy­ancy this year came be­cause of those ex­cise duty col­lec­tions, which in­cre­men­tally dis­ap­pear next year and then oil sub­si­dies pop up a lit­tle bit. There is not too much fis­cal space, par­tic­u­larly if you worry about what hap­pens to tax col­lec­tions af­ter GST.

Given all those con­straints, it will be too much of a gam­ble to cut tax rates this year to try and broaden the base be­cause we in­vari­ably find that the Laffer curve does work when you cut rates, com­pli­ance goes up, but it takes sev­eral years for that to hap­pen, and for rev­enue to be­come neu­tral. This is not the year when you have al­ready have this dra­matic in­di­rect tax change for there to be dra­matic changes on tax rates.

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