Written by Hitesh D Gajaria
The past nine months have been unprecedented as we witnessed a series of relief and economic stimulus measures to help the economy recover from the effects of the pandemic. The focus of these has understandably been on providing relief in the form of food grain, cash transfers and other benefits to the poor, as well as other reforms across sectors.
On the fiscal side, there has not been much by way of relief measures, except for a temporary reduction in withholding tax rates and extensions in deadlines for various compliances, including under the Vivad se Vishwas –a dispute resolution scheme. The forthcoming Budget, therefore, provides an important opportunity for the government to deploy fiscal measures to shore up the economy.
Before we proceed to consider the measures the government can adopt, it is useful to note that there will be a need for significantly increased public expenditure in the coming year, partly due to the need for investments in public health, including the cost of vaccinating our vast population. The government will also need to continue spending on infrastructure and other social programmes.
While these factors will undoubtedly limit the policy options available to the government, a well-designed, targeted combination of measures can still help it raise revenue without adding to the taxpayers’ burden.
To start with, the government should avoid the temptation to increase the tax burden through a temporary or permanent COVID-19 cess or by introducing new taxes. There are multiple reasons for this.
The government embarked on a bold programme to reduce corporate tax rates in September 2019, with across the board cuts and an especially attractive rate of 15 per cent for new manufacturing companies. These measures are yet to start showing results, largely due to the unexpected economic interruption caused by the pandemic. A reversal of these cuts, even partial, could prove to be counterproductive. Similarly, on the personal tax front, tax rates are already quite high, with the top rate touching 43 per cent. A further increase may not be justified in an Indian context.
As regards new taxes, there are limited options available. Narrow-tailored taxes such as a cash transaction tax will not contribute significantly to the exchequer but will result in a higher compliance burden. Similarly, India’s historical experience with estate duties and wealth tax shows that the cost of collection does not justify the revenues raised. Further such levies, when coupled with the already high personal tax rates, could lead to taxation at confiscatory levels, which has always proved counterproductive to investment, spending and employment generation.
If new taxes or higher rates are not feasible, what can the government do? The answer, to my mind, lies in two related sets of measures.
One, there is still room for targeted tax relief that can lead to increased economic growth and consequently higher revenues. For instance, relief for individuals, either through lower rates or an increase in standard deduction can boost spending, which is critical to an economic revival. Similarly, on the corporate tax front, the benefit of the 15 per cent tax regime should be extended to the services sector as well. The Indian economy’s strength lies in its services sector, after all. This could help boost investment, employment as well as exports.
Two, the government should aggressively focus on removing bottlenecks, simplifying compliance, and improving enforcement. The last of these is an area where the government has been taking far-reaching steps, specifically through the use of big data and analytics. The Revenue Secretary also recently observed that increased use of data was one of the factors for higher GST compliance in recent months. These can go a long way in boosting compliance and expanding the tax net. After all, the best way to increase collections is to get more people to pay tax, rather than getting the same set of taxpayers to pay more taxes.
Another area which is ripe for reform is that of dispute resolution. The response to the Sabka Vishwas Scheme and the Vivad se Vishwas Scheme (for indirect and direct taxes respectively) shows that taxpayers are, by and large, willing to pay some amount of tax to avoid protracted litigation. This could be leveraged into adopting a mechanism for an ongoing negotiated settlement of disputes. This could help the government immediately unlock tax dues, rather than await the outcome of litigation that invariably drags on for years. Over time, this can also help unclog the judicial system, and pave the way for quicker resolution of more important tax disputes and better use of departmental resources.
The writer is Senior Partner, KPMG in India