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Burgeoning revenues
November, 10th 2006
Tax revenues need to be ploughed back for the poor and for the productive sectors. Fiscal responsibility is also about public money well spent.

At a recent conference in the capital, the Finance Minister hinted at a cut in both personal income tax and corporate tax in the forthcoming Budget. Mr P. Chidambaram qualified that possibility by linking it to greater compliance, suggesting a reward for the honest taxpayer. The fact is, he should be the first to know that compliance follows easy tax rates, among other things; after all, he had reduced the tax rate to its present levels as Finance Minister in 1997. The Government is reaping the benefits of that policy and better procedural rules, with revenues exceeding past levels. Between April and October this year, direct tax collections showed a more than 35 per cent rise over the corresponding period last year; officials expect Budget targets to be exceeded this year and that is indeed an optimistic sentiment because the Budget estimates were upped well over 28 per cent over the previous year. Unerringly, North Block has scored on its revenue forecasts and this may explain Mr Chidambaram's generous hint about the rate cut.

Much as policy-makers would like to take the credit for increasing tax revenues through their "fiscal consolidation" drives, the tax-payer has responded positively to both the simplification of filing procedures and the lowering of tax rates. The 1997 cut in income tax to around 33 per cent took its time to work its way but it did reverse a declining gross tax-GDP ratio. In 2001-02, that ratio had hit rock-bottom, at 8.2 per cent, from the high of 10 per cent a decade before; then it began to climb to the present figure of 11.2 per cent. Interestingly, in 1990-91 indirect taxes were star performers, contributing 8.2 per cent of GDP compared with 1.2 per cent from direct taxes. Sixteen years later, when the gross tax-GDP ratio have climbed to 11 per cent, both direct and indirect taxes share the honours, at around five per cent each. Cuts in indirect taxes has spurred economic growth to its present levels; widening prosperity has provided the means and lower income-tax rates the motivation for better compliance.

Lest policy-makers get complacent about compliance they must remember that tax revenues need to be ploughed back for the poor, the provision of drinking water, basic literacy and sanitation; and for the productive sectors, better infrastructure to sustain growth. Fiscal responsibility is not just about better bookkeeping but equally about public money well spent.

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