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