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M. R. Sivaraman

THE TAX reforms initiated by the former Finance Minister, Dr Manmohan Singh, and carried forward by Mr P. Chidambaram have, indeed, gathered momentum during Mr Yashwant Sinha's term.

The unification of excise duties into one single rate was contemplated during Dr Manmohan Singh's fourth Budget. But it was not attempted as being too radical at that time and a process of gradual integration of rates was considered wiser in keeping with the gradualist approach on many matters during that period. Moreover, such a radical approach would have cost the exchequer in terms of revenue.

Mr Chidambaram started the unification of rates with his first Budget and declared that his aim was to have a single rate. This, however, does not mean that it would be possible to have one rate across the board for all the excisable commodities for more than one reason. Commodities or products consumed or bought by the relatively well-to-do have to bear a higher burden of tax to compensate for the loss of revenue from exempted commodities. It is also considered socially obligatory to tax at a higher rate, such goods as vehicles, air-conditioners, refrigerators, cosmetics, and so on. Though theoretically it can be argued that a modest tax on such goods with high price elasticity could, by price reduction with lower levies, increase demand more than proportionately and compensate revenue loss by lowered tax rates. This has to wait for better times.

While Mr Yashwant Sinha has kept the trend towards lowering Customs duties, he also seems to have been subject to lobby pressures in keeping high rates for certain agricultural commodities. While it may afford some protection to domestic producers, it is unlikely to do any long-term good to this sector as a whole, as it will be a disincentive to increase productivity, quality and reduce costs of production. The economy will lose in the long run.

It is better that the Finance Minister puts this sector on notice now that this special treatment will end, say, in three years, before which they have to take appropriate measures. It is not clear if the innumerable notifications that clog the Customs and Excise laws, dramatically reduced by Dr Manmohan Singh and Mr Chidambaram and subsequently increased by Mr Yashwant Sinha have been done away with.

There was an attempt to align the classification used for excise and sales taxes with the Harmonised System of Nomenclature (HSN) used for Customs duties. This will be the first step towards the unification of commodity taxes in India. At present, the total burden of commodity taxes is high and leads to a misallocation of resources, apart from the large-scale evasion it encourages among the assessees and the consumers, with both colluding to avoid payment of taxes. I firmly believe (and have not hesitated to say this even before a Parliament committee) that evasion of taxes in India could be as high as 100 per cent and it is natural when on certain commodities the total burden of indirect taxes well exceeds 25 per cent. As regards direct taxes it is time for a new I-T Act as the current one has far too many amendments, made since its creation in 1962.

It has become a maze and whenever a tax law is understood less, it becomes increasingly less productive as it is in India.

Surprisingly, Mr Yashwant Sinha has restored an age-old concession of giving exemption to investment in new machinery. It is this concession in its varied forms that was exploited to good measure by many zero tax companies in the past. Nobody is going to add to his investment unless it yields a return. This is likely to be misused more than used to promote investment.

To add to the confusion of law, Mr Sinha has also complicated tax administration by adding scores of chief commissioners (CCs) with a promise to add Rs 7,500 crore to revenue.

But this has not happened; on the contrary, the new CCs have probably appropriated for their use the facilities given at the cutting edge level to improve revenue collection.

Here again, Mr Sinha fell a victim to the pressures of the system which itself was responsible for the mess. Former revenue secretaries, chairmen of CBDT and to a lesser extent of the CBEC are all guilty for which the Finance Ministry and the country are paying for so dearly.

Ironically, the Revenue Department has failed to reach targets year after year. This speaks volumes for the tolerance of Parliament as it has not asked for accountability for such poor performance on the revenue front.

It is time the Finance Minister started devoting attention to the improvement of tax administration by making the system accountable for corruption and non-performance.

When one visited the remote parts of the Gujarat coast, one was taken aback to notice scores of catamarans and larger vessels using the deep waters along the coastline to load and unload cargo to and from the West Asian ports. There was no accounting for this flourishing international trade.

The Customs staff posted there were getting richer by the day, issuing crew passes to work on these vessels.

When a report of this was given to Dr Manmohan Singh, he promptly asked the then CBEC Chairman who, in turn, was quick to acknowledge the serious omission of his other colleagues and officers. There was to be a registration of these vessels and proper accounting of the cargo they carry in and out of India.

The system of issue of crew passes was to be centralised with proper verification of the persons applying for the issue of the passes. This is even more important now, in the context of the war against terrorism.

The Finance Minister has to now open the second phase of reforms of strengthening and improving the delivery capacity of the Revenue Department as a whole.

(The author is former Revenue Secretary, Government of India.)

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