Slowdown upends taxmans high hopes

Written by Gireesh Chandra Prasad | New Delhi | Updated: Dec 29 2012, 06:53am hrs
Persistent global economic worries and a slowing economy at home have played havoc with the finance ministrys hopes of a 20% jump in tax revenue this year. Only less than half of the targetted net tax revenue has been collected up to October.

A spurt in advance tax collection in December may make revenue collection a bit better but the trend so far has been that of a progressive decline in growth rate in taxes. The change of approach from an aggressive revenue mobilisation drive to a non-adversarial tax regime promised by finance minister P Chidambaram has, in the meantime, posed a major dilemma to policymakers whether to embrace an investor-friendly climate sacrificing revenue in a very difficult year in which diesel price had to be raised and subsidised LPG supply had been limited.

Even the introduction of a negative list based approach from July 1 could not help service tax collection beat the trend of declining growth. Service tax receipts that grew 40% in the first quarter this fiscal dropped to 28% in the next four months up to October even as the economy lost steam. Economic growth had fallen to 5.4% in the first half from 7.3% in the same time a year ago.

The government could not sustain the soft-pedalling of refunds that helped to show an impressive net personal income tax growth in the first two months of the fiscal as delays in returning tax payers money cost the exchequer a 6% annual interest cost, experts said. Delaying refunds had helped the tax department to show an illusory spectacular growth in initial months a near seven-fold jump in net direct tax collection in April and a near two-fold jump in May. The growth figure then tapered down to 15% in November, while gross direct tax receipts remained strictly range-bound between a contraction of 7% and a growth of 7% in the first eight months of this fiscal.

The only two classes of levies that defied the trend were customs and central excise, which of course, could not offset the decline in tax collections. A 17% jump in imports so far helped the customs duty to reverse a contraction in initial months, while the excise, the tax on manufacturing, showed a double digit growth despite the less than a percent growth in manufacturing sector in the first half. Indirect tax collection grew 16.8 % to R2.92 lakh crore in the April-November period against the annual growth target of 27%.

The difficulty before the government in going ahead with the Parthasarathi Shome committees recommendations on General Anti-Avoidance Rules and on indirect transfer of Indian assets is that it would force the revenue department to drop its income tax demands in many cases.

Ministry sources told FE that the tax base is finite and letting the big fish go would force the government to raise indirect taxes that affect the common man more.

While the top brass of the government is undecided on the the Shome panels recommendations, the field forces continue to enforce existing policies vigorously. Experts said that when India is competing with other nations for investments, it should not set revenue collection targets for its officers.

It is not prudent to allocate targets to officers, whose duty is to uphold the law. It should also be clear that the quality of staff and not the revenue raised should be the yardstick to assess officers, said Theo Keijzer, chairman of Paris-based think tank ICC Commission on Taxation.