The economic crisis triggered by Covid – 19 has forced the government to take recourse to some extraordinary measures which include among others 30% cut in the salary of all Members of Parliament [MP] besides the President, Vice-President and the Prime Minister, suspension of the MPLAD [MP Local Area Development] scheme and steep cut in the expenditure by ministries and departments.
Reportedly, barring some 18 ministries/departments connected with healthcare and medical infrastructure and other essential services who can spend 100% of their budgeted allocation, for all others, steep cuts are contemplated. Whereas, 33 ministries and departments can spend only up to 20% of the budget, in case of 50 others, the expenditure limit is even lower at 15%. This would mean a virtual freeze on all project and development related activities/work.
Faced with a double whammy of mammoth expenditure commitment – mostly on account of having to protect the livelihood of tens of millions in the informal sector [whose income is reduced to almost ‘nil’ under the national lockdown] on the one hand and steep decline in tax collection [over Rs 400,000 crore according to an estimate] on the other, the government’s worries on account of fiscal deficit going completely out of control have heightened. In this backdrop, and dire need to show that our macro-economic fundamentals are strong may have prompted it to take recourse to steep cut in expenditure.
Inevitably, this will affect India’s medium to long-term growth trajectory as implementation of projects gets deferred. In these moments of grave crisis when saving precious lives and livelihoods is top priority, this question may look odd. There is also no denying the fact that in a situation of acute resource scarcity, available funds can only be used for saving lives. But, we can’t get away from a fundamental question as to why in normal times, governments should not endeavor to create a buffer for the rainy day? Far from it, both the centre and states have indulged in fiscal profligacy.
On close scrutiny of how they work, three strands come out clearly. First, despite lofty declarations to rein in unproductive expenditure including reduction and rationalization of subsidies [targeting only at the poor and vulnerable], these expenses continue to rise. These are mostly the result of populist promises such as free electricity, free water, farm loan waivers, free bus ride etc made by political parties to win elections. None of these [including farm loan waiver] have anything to do with increasing the productive capacity.
No wonder, major subsidies continue to increase to unsustainable levels. For instance, food subsidy increased from Rs 145,000 crore during 2017-18 to Rs 219,000 crore during 2019-20 and is projected to increase further to Rs 253,000 crore during 2020-21 [this was before Corona crisis, now this will further spike courtesy, additional allocation of wheat or rice for free during three months]. Likewise, fertilizer subsidy continues to hover around Rs 80,000 crore notwithstanding several measures like neem coating of urea, changes in the pricing norms for urea manufacturers aimed at reducing it.
There are a host of subsidies at the state level such as electricity, irrigation, credit, farm loan waivers, bonus over and above minimum support price [MSP] notified by the union government, payment of sugarcane arrears to farmers that cost the states hundreds of thousand crore. Studies have shown that a major slice of these subsidies is cornered by better-off farmers [those with land holding > 2 hectare] even as majority of resource poor farmers are left out.
Second, tax collection is not only far below India’s potential [the tax-GDP ratio in India – after including the Centre and states’ tax revenue – was about 17% during 2018-19 which is almost half of the average tax-GDP ratio of OECD (Organization for Economic Corporation and Development), a club of rich/developed nations) countries, being 34.3 per cent in 2018] but also has been consistently lower than the target set by the government. During 2019-20, total tax revenue of the centre – after devolution to states – was about Rs 200,000 crore less than even the revised estimate [RE] of Rs 1400,000 crore [as shown in the budget for 2020-21 presented on February 1, 2020] and a whopping Rs 400,000 crore lower than the budget estimate [BE] at Rs 1600,000 crore in the budget for 2019-20 presented on July 1, 2019.
This has a lot to do with the inability of our tax administration to make industries, businesses and individuals [especially the so called high net-worth individuals (HNIs] pay their legitimate share of taxes – both in the direct as well as indirect. This is further exacerbated by cumbersome tax laws and slow moving judicial systems which tax evaders exploit to the hilt. The tax dues locked up in litigation run into hundreds of thousand crore. To get an idea, let us look at the following.
Under the ‘Sabka Vishwas’ Scheme [SVS] [it offered to settle still-unresolved disputes relating to excise and service tax under the erstwhile dispensation prior to GST regime launched from July 1, 2017] launched on September 1, 2019, a total of about Rs 250,000 crore indirect tax dues from 183,000 assesses were involved. Fed up with protracted litigation and desperate to garner some revenue, the government offered relief varying from 40% to 70% of the tax dues depending on the amount of dues involved in disputes other than those covered under ‘voluntary disclosure’. As a result, all that it got was a paltry Rs 38,000 crore or 15% of the total dues.
Another scheme christened ‘Vivad se Vishwas’ [VSV] announced by the finance minister, Nirmala Sitharaman in her budget speech for 2020-21 relating to direct taxes – both corporate and personal income tax – the disputed amount is much higher at Rs 996,000 crore involving close to 500,000 cases [according to the Parliament Standing Committee on Finance]. Here again, in its desperation to get some revenue, the government has offered to do away with interest and penalty if the disputed amount is paid before June 30, 2020. How much it will garner? One can only wait and watch.
That apart, in a bid to look business friendly, Modi – government has gone to ridiculous limits in offering tax concession that has led to huge revenue loss. For instance, under presumptive tax scheme, for businesses having turnover up to Rs 1 crore per annum, its profit is presumed as 8% of the turnover [6% in case, the firm conducts all its transactions in digital mode]. Thus, for a firm having Rs 1 crore turnover and doing it all digitally, its income is taken as Rs 600,000/- on which the tax works out to a mere Rs 33,000/-. If, its actual profit is Rs 2000,000/- its tax liability would have been Rs 425,000/-.
As a consequence, the firm ends up paying 1/13th [33,000/425,000] of what it should have been paying. One shudders to fathom the magnitude of revenue loss to the government because of this extreme generosity handed out in the name of ‘ease of doing business’. Given the cult of not paying taxes nurtured for generation among Indian business community, one won’t be surprised if several of them may not paying even a paltry Rs 33,000/- to cite the above example.
Third, the government is banking too much on the petroleum products [POL] for boosting its revenue. During 2018-19, the centre mopped up Rs 258,000 crore from this sector [Rs 214,000 crore from excise duty alone], whereas states garnered Rs 227,000 crore of which VAT [value added tax] alone contributed Rs 200,000 crore.
Both grab every available opportunity to hike taxes on POL. Effective March 14, 2020, the union government hiked central excise duty [CED] on petrol and diesel by Rs 3 per litre each from an already high of Rs 20 per litre and Rs 16 per litre respectively [further, in the wake of Corona crisis, it has also taken parliament’s nod for further increase in CED by up to Rs 8 per litre each any time it wishes]. This has resulted in a situation wherein taxes [CED and VAT] alone account for over 50% of the retail price of these products.
We can’t be oblivious of the fact that high tax on fuels comes at a heavy cost. This contributes to high inflation, higher subsidy payments on fertilizers, food, irrigation etc which takes away a good slice of higher revenue from fuel tax. At present international price of crude oil is low which helps in moderating inflation. The situation will become very painful when crude price goes up.
The government needs to do serious introspection and implement much needed reforms to create a sustainable basis for balancing its budget; in fact, create revenue surplus so that it can deal with crisis situations without jeopardizing development.