Focus on revenue mopup via big ticket tax reforms

The 2005-06 is set to focus on revenue mobilisation through big ticket tax reforms to achieve fiscal consolidation, going by the pre-budget economic survey. Revenues are set to be raised by taxing more services, removing exemptions and innovative changes in tax policies.

However, 2004-05 could well see a slipppage in the revenue deficit target due to shortfall in excise and corporate tax collections. Notwithstanding this, the government appears optimistic about meeting the commitments made under the Fiscal Responsibility and Budget Management Act (FRBM) in the coming years. Revenue deficit is to be fully wiped out by 2009.

In the first half of 2004-05, fiscal performance did not measure upto the FRBM benchmarks. Revenue deficit at 78.7% was considerably higher than the FRBM benchmark of 45%.

Although there was an improvement in the tax collections in September, the government is unlikely to meet the targetted revenue deficit of 2.5% of the GDP for 2004-05.

Fiscal deficit has, on the other hand, been targetted at 4.4% of the GDP. The targetted reduction in both revenue and fiscal deficit is more than the minimum reductions stipulated by the FRBM — which is an annual reduction of 0.5% of GDP in revenue deficit and 0.3% in fiscal deficit.

The economic survey is clear that fiscal reforms cannot be sustained without the active involvement of states which accounts for about 39% and 56% of the combined revenue receipts and expenditure.

Only five states have so far enacted the FRBM legislation. The Twelfth Finance Commission has provided the basis for harmonisation of fiscal reforms at the centre and the states by linking debt relief to reform milestones.

The government also hopes to improve the fisc by sustaining expenditure reforms through containing unproductive expenditure. The survey has recommended a shift in favour of capital expenditure, raising expenditure in social sectors and infrastructure to meet the common minimum programme goals. It is, however, silent on disinvestment.

The emphasis is on revenue led growth through tax reform measures and improvement in tax administration. According to the survey, both the centre and states need to improve tax administration to have an impersonal and hassle free regime, with a low compliance cost for the honest tax payer and a high risk for the evader.

The operationalisation of the Tax Information Network (TIN) is expected to aid in nabbing evaders. The mantra is to push use of information technology in a big way not just for information collection and analysis, but also for automatic collection of tax revenues at source.