Unsustainable taxes regime

Unsustainable taxes regime

Subir Gokarn, Reserve Bank of India’s deputy governor, on Tuesday identified the Union government running a revenue surplus as an important ingredient in sustaining high economic growth. Indirect taxes critically influence the revenue surplus, a measure of excess current income over current expenditure. Gokarn’s prescription of sustainable growth provides an opportunity to turn the spotlight on the unsustainable nature of India’s indirect taxes.

On the surface, last fiscal was a good year for indirect taxes. The provisional collection number has grown by 40% to 3.42 trillion. Probe further and the weak foundation of the tax structure reveals the price extracted by years of successful lobbying for exemptions.

Customs and excise duties on crude and its downstream petroleum products keep the indirect tax structure afloat. As the price of crude increases, the political pressure to lower taxes on crude and petroleum products will also increase, as it happened in 2008. Once the taxes are lowered, the Union budget assumptions and that of states, too, will inevitably go wrong and pose a threat to growth.

Oil has contributed 48-61% of all central excise collections in the last four years. Last fiscal it was half the total collection and is likely to remain at the same level or increase this year.

Oil’s recent contribution to customs is not in the public domain yet, but as the price of crude increases, oil’s relative share goes up. This, in turn, pushes up customs’ contribution to indirect taxes. Aggregate indirect taxes—customs, central excise and service tax—were expected to contribute about 2,000 crore to the exchequer in the last two days of fiscal 2011. Half of it was expected to come from customs, a substantial increase from the 38-40% it typically contributes.

High taxes on the retail price of petroleum products feeds into inflation. Given the opaque nature of taxation of these products, customers are unaware of how costly fuel in India is.

A comparison with some other South Asian countries with similar developmental challenges shows the skewed pattern of India’s indirect taxes. The incidence of tax on diesel’s retail price in Delhi is 31%. In Pakistan, it is 24%; in Nepal, 18%; and Sri Lanka, 9%.

The dangerous dependence on taxing oil is partly on account of the limited tax base. A plethora of exemptions on goods and hesitant steps in taxing services leave the government with little choice when its social sector commitments are rising. Given the danger oil poses to Central and state budgets this year, it’s imperative negotiations on the goods and services tax focus on widening the tax base.

How can India’s indirect tax structure be strengthened? Tell us at views@livemint.com