It’s time to unclutter tax regime

I’M A PROPONENT of simple Budgets. For me, that means few tax rates or a single one with limited or no deductions that are uniformly applied across the economy and where tax rates are uniformly applicable across all types of all products and services. Moreover, a simple Budget can become more credible if the challenges and opportunities are quantified and shared transparently with the public. This Budget fills only a very few of these directional check boxes, but more on that later.

However, the Budget does one good thing that deserves special mention. It does not treat the fiscal deficit of 3.5 per cent as sacrosanct and increases the benchmark to 3.8 per cent since GST collection has been immensely off-target. Yet, it does not go overboard in ramping up expenditures to address the apparent slowdown, since it is not clear whether simply spending more will address the slowdown despite what many in industry or the financial sector believe.

One very different and positive component of the Budget was allocation towards air quality of ~4,400 crore. Financial allocation is the first signal of what a government takes seriously and what it does not, and this ramped-up allocation is indeed a breath of fresh air, for it’s not just the broad allocation that is interesting, but that it will be based on efforts by state governments to improve the air quality parameters. To add to that is the advisory to power plants to close down old and high carbon emitting power plants. Of course, the air quality emergency may require much more, but making all allocations based on objective measurement, the effectiveness should be better than many other government programmes. The finance minister spoke of Shanghai and Paris agreements and also of making infrastructure resilient to climate change. This is perhaps the first time that the Budget speech devotes so much time to the environment.

Beyond that there are many desirable steps, many undesirable ones, and many that are difficult to figure out on a 0:1 or bad: good scale. But on the neat, simple, and clean Budget objective, this Budget document does not do well. Why is a single or few tax rates uniformly imposed with few deductions important? Why should it be an objective at all? And can this still be done?

Whether it is corruption or a non-corrupt yet intrusive inspector raj, or the cost of keeping books clean, or the transaction costs of collecting and paying taxes, all are worsened by such a cluttered tax regime. Multiple tax rates applied non-uniformly with various deductions mean the tax payer has to prove to the government which category he or his product or service falls under. The revenue official has to keep an extra strong vigil to ensure that the government is not being fooled, and the focus of many accountants becomes more on finding loopholes than ensuring honest compliance. This makes the whole system quite inefficient and time-consuming.

On the government side, this reduces their ability to monitor the small defaulter, and the fake bill industry has reportedly taken off big time, thus leading to black money generation, corruption in the lower ranks, high cost of transactions, and as a result high cost of business. Successive governments have not addressed this problem which exists across all of government revenue collection, at both central and state levels, covering both direct and indirect taxes. And both the government revenues are reduced and business costs are increased.

The budgetary figures continue to not cover many forms of expenditures. The Food Corporation of India, for instance, has picked up massive debt for food security operations that should be paid from the Budget. Many government departments have not received payments, many departments have not made payment. Sometimes these cases reach the court, further harming the private sector contractor, and helping clog the judicial system. Since everyone knows of this practice of not providing for all expenditures adequately, the government is fooling no one. At the same time it is harming many, both within the government and outside it.

Multiple tax rates applied non-uniformly with various deductions mean the taxpayer has to prove to the government which category he or his product or service falls under. This makes the whole system quite inefficient and time-consuming