Gulzar Natarajan’s “Towards a fairer tax system” (Mint, 3 June) makes a strong case for reducing the fiscal deficit by increasing the tax-to-gross domestic product ratio. The justification for higher taxation is based not just on India-China comparisons, but also the need for redistribution of income. However, this accounts for neither the structure of the Indian economy nor the efficiency of the plumbing which conveys these funds.
The government of the day is voted in to deliver a set of promised outcomes through a series of schemes, to run which it justifiably asks for funding through taxes. The government can claim its right to tax us; however, would it be unfair to ask the government to perform its duty to justify its claim for increased funding? As surely as rights and duties go hand in hand, so should taxation and execution on various schemes funded by such taxes.
Consider primary education, one of the most critical sectors. From the data available on the website of the ministry of human resource development, there are 32 schemes under the “School Education and Literacy” programme focused on primary education. Two of the 32 schemes are the flagship schemes of Sarva Shiksha Abhiyan (SSA) and mid-day meal (MDM), which are funded mainly from the primary education cess. The budgetary allocation for SSA was Rs13,100 crore and that for MDM scheme was Rs8,000 crore. The total budgetary allocation for the remaining 30 schemes for 2008-09 was Rs6,750 crore. As of February, the total expenditure on these 30 schemes was Rs3,900 crore, about 58%.
At the end of 11 months, some important schemes such as an universal access and quality for secondary stage programme had an allocation of Rs2,185 crore but zero utilization. Even in the MDM scheme, 25% of the funds had not been utilized, with little of the fiscal year left. Surely, the taxpayer is justified in asking for implementation to be fixed before proceeding with requests for further funding, for unspent funds is a wastage of capital.
Moreover, a lot can be done to improve the efficiency of tax collection. If there are ‘n’ number of laws requiring a citizen to pay taxes, then there are another ‘m’ number of laws which allow for deductions. This makes the job of the payer and the collector quite complex, leaving only tax professionals happy with the situation. Any attempt to simplify the tax codes—but in incremental steps—would be welcome.
The taxation regime is dependent on the structure of the economy and, hence, comparing India’s marginal taxation regime with a government-driven economy such as China is not correct. In India, private consumption accounts for about 55% of economic activity, while government consumption is about 11.5%. The preponderance of private consumption and savings (that translates into investment) already makes the case for an increase in economic activity through an increase in personal disposable income stronger than the same through an increase in government expenditure. It is notable that most democratic economies, including our own, have chosen to stress both personal consumption and government expenditure.
The fiscal deficit, too, needs to be reduced to manageable levels. However, raising more taxes would not lead to the desired social and economic outcomes. India’s experience with different tax regimes is, in fact, a case study supporting the Laffer curve—named after US economist Arthur Laffer—where tax revenues grow manifold as rates of taxation are lowered.
The need of the hour is better execution of existing schemes by utilizing the funds already provided by the public, and by reducing “non-Plan” expenditure (not allocated in the Five-Year Plan). The taxpayer should consider further funding only on demonstration of the fact that the government’s execution machinery has improved.
Puranika Narayana Bhatta runs a finance and operations consulting firm in Bangalore. Comment at firstname.lastname@example.org