Taxing troubles

New laws require a parliament that works

Finance Minister Yashwant Sinha wants to set up an Economic Law Commission to modernise and simplify the tax system in the country. An excellent idea. The real issue is whether the labours of such a commission of wise men can get past Parliament, not because Parliament will not approve new tax laws but because Parliament does not seem to have time to discuss any bill at all. The budget session began with a backlog of several economic bills pending its consideration from previous sessions. None of this business could be transacted because the ‘honourable’ members of the august body were busy obstructing Parliament’s work rather than catching up with unfinished work. Expert commissions will come and go, new recommendations will be made and discussed but forget about getting legislation through. Mr Sinha must not be discouraged by this and we certainly would like to see him push for more reform in the tax system considering that the tax-to-national income ratio remains stubbornly below the pre-1991 level even a decade after economic liberalisation during which period national income growth was upwards of 6 per cent per annum.

While such reform will take time to impact on revenue collections, Mr Sinha is right now faced with the immediate task of improving his government’s finances, faced with a shortfall in direct tax collections. Last quarter’s bravado on the revenue front, with claims that budgetary targets will be exceeded, seems to be giving way to serious concern about revenue shortfalls, thanks in part to the stagnation in the industrial economy.

Since the agricultural sector pays very little tax and given that tax evasion is much higher in the services sector, the fact that economic growth over the last two years has come only from the growth of incomes in these two sectors of the economy should have alerted the finance ministry to the prospect of lower tax collections. If the industrial sector does not grow, where will the revenues come from? The slackness in revenue growth is reflected in increased borrowing. Mr Sinha has some serious problems in his revenue budgeting which he must address now, before any commission of wise men can come up with ideas on reforming the system. Cutting a range of subsidies will be a good way of generating the revenues required to bridge the deficit. Does this government have what it takes to bit this bullet?