Tax reforms are very crucial to the reforms process.

One of the most

serious problems of central finances has been the declining Gross Tax
Revenues (GTR)-Gross Domestic Product (GDP) ratio, which declined by
almost two percentage points from 10.3 per cent in 1991-92 to 8.1 per
cent in 2001-02, and then recovered to nine per cent in 2003-04 and
reached a level of 11.4 per cent in 2006-07 and improved further to 11.8
per cent during 2007-08. It is expected to reach a point of 13 per cent or
so during 2008-09 fiscal.

In time to come, it is expected that it would further move up. This has
happened because of the structural shift in the central government's
ability to mobilise resources. Such a shift enhanced revenue mobilisation
through reasonable rates, better compliance and widening of the tax base
is yielding tangible results. In this context, we must also remember that
the revenue from direct taxes has shown high buoyancy since tax reforms
were initiated in 1991, but there has been no such improvement in the
indirect taxes both in terms of administration and enforcement. But even
this “high” GTR-GDP ratio is too low as compared to other developing
countries.

The last year’s budget had completely ignored these issues. The low GTR-
GDP ratio has put a serious limitation on the government’s expenditure,
because in terms of the Fiscal Responsibility and Budget Management
(FRBM) Act, there is no scope, whatsoever, for additional borrowings. We
must also keep in mind the fact that, in the present tax structure, a)
there are only four major taxes (both direct and indirect) that account for
the government revenue. The largest is the excise duty, followed by the
corporation tax, customs duty and income tax, in that order; b) the
manufacturing industry is the basic source of these taxes and duties; c)
with a one-fourth share in GDP, industry provides three-fourths of GTR to
the government; d) the value of all these taxes and duties depend on the
value of output and hence on their prices (ie, higher is the value of
output/ higher is the inflation, higher will be the revenue); inflation, in
fact, increases both revenues and expenditure and as such, it does not
actually help in the desired way and e) agriculture and many other
services have always been outside the tax net.

The budgets over the last few years have initiated little bit of tax reforms in
order to mobilise higher tax revenues. The introduction of countrywide
value added tax (VAT) from April 2005, has contributed, though
marginally, to higher tax revenues.

Despite the fact that the forthcoming budget will be greatly affected by
the on-going world-wide recession basically because of the financial
meltdown essentially because of the weakening of the capital market, low
liquidity and lack of confidence, it should be vigilant and look at the other
sources of raising revenue like increasing the tax net of income tax,
extending it to the agricultural sector, where most of the urban income
gets invested by the so-called richer people with a view to avoid taxation.
Such steps will surely push up the GTR to higher levels and push the
economy towards macro economic stabilisation and achieve higher rate of
economic growth.

There is no doubt that the tax reforms will surely have their fall-outs on the
common man. The government, therefore, will have to strike a trade off
between the tax reforms and their short-run fall-outs on the common man.
This will best be achieved by assuring that the benefits of growth, no
matter what the rate of growth is, reach the masses through percolation
(trickle down process) in terms of say, low prices of things of daily use,
low taxes for the common man and reasonably attractive interest rates
(within the present day policy of low interest-rates-regime) and also in
non-monetary terms like, basic social provisions, day-to-day security,
effective law and order situation, public discipline and responsibility and
elimination of ‘rent-seeking’ nefarious activities. No doubt, such a trade
off is a difficult exercise, but it is not impossible. If the government has a
strong will and realises its responsibility towards the well being of the
nation, an optimal trade off can be achieved. In case such a trade off is
not worked out, the tax reforms would be really hard for the people in
various ways.