Indirect measures

Budget 2008-09 offers an opportunity for reduction in tax rates due to vastly improved tax collections. The finance minister has tried to play down expectations of a tax cut on the ground that it is to be ascertained how much compliance has really improved. Evidence suggests a robust increase in government direct tax collections in recent years. This fiscal too, direct tax collections are much higher than budgeted targets. The latest quarterly data shows that Central government income tax receipts rose by 42 per cent in July-September 2007 over the corresponding period last year. Corporate tax collections have increased by 34 per cent in the same period.

The improvement in tax collections has come about especially after the introduction of the Tax Information Network (TIN). Under the TIN, information for tax deduction at source is reconciled with actual tax payments made. This system implemented by National Securities Depositories Limited with its all India presence and well-designed IT systems has been able to improve compliance at a rate which India has never seen before. Until then paper based systems saw huge leakages. This was supplemented adequately by the Annual Information Reporting system, under which the finance ministry tallies individual incomes with their expenditure patterns. While part of the improvement in tax revenue is also cyclical as the economy has witnessed high GDP growth, it clearly is not the only story. This is clear from the data on excise. In the same quarter excise collections fell by 0.8 per cent compared to last year.

Improved compliance in direct taxes should mean three things for the forthcoming budget. First, it offers an opportunity to clean up direct taxes further. The most obvious step to take in Budget 2008-09 is to get rid of the surcharge. Second, the best time for reducing public debt is on the high of a business cycle. While the fiscal deficit has come down, off-budget subsidies like oil bonds and food bonds have seen a rise. This must be taken into account while looking at a trade-off between tax cut and fiscal correction. Third, this is a time to bring in tax collection improvements into the system of indirect taxes. The sharp improvement in direct taxes is a lesson on what better compliance can achieve. Hopefully, the Goods and Services Tax, which is to be introduced in April 2010, will be implemented in the way TIN was, with technology serving the needs of the system. This could dramatically improve compliance in indirect tax collection too.