1. Budget 2007-08: Tax Proposals M. Govinda Rao National Institute of Public Finance and Policy

2. Introduction Tax revenues have shown high buoyancy. Contributed significantly to fiscal adjustment. Slow growth of union excise duties is a cause for worry. Further tax reforms should attempt to integrate the tax system (from the prevailing fragmented system), make it simple and transparent. The FM had set the target of evolving a coordinated system of consumption taxes – GST to be achieved in 2010. Initiatives in this regard are important.

3. Towards Fiscal Consolidation Fiscal targets set for 2006-07 have been achieved. The RD target is 1.5 per cent of GDP. In 2008-09 this should be brought down to zero. Is that feasible? How has the fiscal adjustment taken place so far?

4. How Has the Adjustment Come About Increase in Tax revenue over 2001-02 was 3.2 points (from 8.2 to 11.4% of GDP). This is distributed between reduction in non-tax revenues (1.1points), larger central transfers to states (0.95) and transfers to state/district level autonomous bodies (1.1 points). Centre’s own expedniture was reduced by 2.3 points to achieve the revenue deficit by the same magnitude. Implications Not correct to state that fiscal adjustment is due to increase in tax revenues. Lager transfers to states: improvement in states’ fiscal health. Direct transfers to autonomous bodies – do we have efficient delivery system? Accountability? Implications for fiscal federalism?

5. How Has the Adjustment Come About? Percentage Point Changes to GDP 2006/2001 Gross Tax Revenue3.16 Gross Total Revenue2.07 Transfers to States (Shared taxes + Grants)0.95 Transfers to State/District level autonomous bodies1.09 Centre’s Direct Expenditure-2.33 Interest Payments-1.16 Revenue Deficit-2.36 Fiscal Deficit-2.48

6. Trends in Tax Revenue High buoyancy of tax revenue, particularly direct taxes. Warrants a re-look at the structure. The buoyancy is not merely due to high growth of manufacturing and service sectors. TIN has played an important role: Lessons for union excise duties. Building information system and exchange can help to have lower rate of (say 15%) of GST, when introduced. The tax revenue growth assumed in 2007-08 budget (17%) seems to be an underestimate.

7. Trends in Tax Revenue Tax heads2001-022006-07 Growth Rate 2007-08 Direct Taxes3.035.575.8526.69 Corporate Income Tax1.603.563.6831.38 Personal Income Tax1.402.002.1620.57 Other Direct Taxes0.030.01 6.10 Indirect Taxes5.175.796.1415.05 Customs Duties1.771.992.1614.80 Excise Duties3.182.85 10.18 Service Tax0.140.931.1067.19 Others0.080.03 -5.20 Total-Gross Tax Revenue8.2011.3611.9819.87

10. Tax Reforms Desirable features: Reduction in customs; Dividend tax: Towards a partial integration and horizontal equity; Withdrawal of exemptions under MAT under Sections 10 A and 10 B. Extension of the tax to ESOP. Selectivity in tax policy continues: Retrograde policy in the Cement sector. Selective taxation of services sector. Undesirable Features : Reforms do not advance GST reform much. Reduction in CST too little; Amendment of definition of small scale industry; Selectivity in excise and customs: The special treatment of biscuits, food mixes, umbrella, parts of footwear, plywood, water purification devices, dog and cat food and cement. Continued selectivity in service taxation; Missed an opportunity to convert the central excise into a MANVAT on goods and services. Centre has to take leadership in GST; Need to finalise the Roadmap.

11. Concluding Remarks Difficult to achieve FRBMA target on revenue deficits. Revenue increase has provided a lot of cushion for both centre and states. Low Underestimation of revenues provides scope for increasing expenditures during the year. Building information system – extremely important for evolving a low rate of GST. Not much in tax reforms. Some attempt at broadening the base. Selectivity continues. No GST strategy.