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Towards an open budget system
February, 10th 2010

When was the last time the government changed income-tax rates for individuals? Well, more than 13 years ago! That change was an initiative of P Chidambaram in February 1997 in his second Budget for the United Front government. Mind you, we are talking about income-tax rates and not income slabs, which attract different rates and have changed over the years to factor in inflation and the need to provide more fiscal concession to taxpayers.

In February 1997, Mr Chidambaram fixed the income-tax rates for individuals at 30 per cent, 20 per cent and 10 per cent, depending on specific income slabs. The rates have not changed since then, although some finance ministers have imposed surcharges on these rates and some have withdrawn them.

Such remarkable stability in income-tax rates is always welcome and is one of the major gains of the tax reforms strategy of successive finance ministers starting from Manmohan Singh in 1991. The stability is in evidence also for corporation tax rates. For almost five years now, the corporation tax rate has remained at 30 per cent.

Once again, it was Mr Chidambaram who, in his February 2005 Budget under the United Progressive Alliance government, brought it down to 30 per cent. In February 1997, it was Mr Chidambaram, who reduced the corporation tax rate to 35 per cent. Here also, surcharges were levied on the rates and later withdrawn, but the actual rate remained in the 30-35 per cent zone for well over 13 years.

Indirect taxes, too, have seen few directional changes. The excise duties (also known as the Cenvat rate) declined to three rates of 8 per cent, 13 per cent and 18 per cent by February 1997. Since then, these have merged into one rate 16 per cent by March 2001, 14 per cent by March 2008 and then 8 per cent in 2009, thanks to the need for fiscal stimulus measures to revive a slowing economy. Customs duty (the peak rate), too, declined from 50 per cent in February 1997 (it was brought down to 150 per cent in July 1991) to 10 per cent by February 2007 and all finance ministers during this period did their bit to bring the rates down.

Yes, there have been changes in the nature of concessions for specific sectors through exemptions, cuts or increases in the duty rates. But the broad rates for both direct and indirect taxes have remained stable.

What does this mean for the Union Budget for 2010-11 that Finance Minister Pranab Mukherjee will present to Parliament on February 26? Nobody expects any dramatic alterations in the tax rates. The Cenvat rate of 8 per cent may go up a little as part of the move to phase out the fiscal stimulus measures introduced in 2009. The income slabs may change, but the basic income-tax rates and the corporation tax rate should remain unaltered until the Direct Taxes Code is ratified and enforced later during the year. The proposed goods and services tax structure is not going to be ready either.

On the expenditure side also, the governments flexibility is limited. Four items of expenditure, on which the government has virtually no scope for discretion, account for around 60 per cent of its total expenditure. The governments interest payment liability is already around 22 per cent of its total expenditure of over Rs 10 lakh crore and will go up next year. Defence expenditure accounts for another 14 per cent and this too will rise given the governments commitment on fresh defence equipment purchases next year.

Subsidies take away 11 per cent of the governments total expenditure and show no signs of any decline. Indeed, they might even go up with the government making no headway on introducing market-linked prices for more varieties of fertilisers and petroleum products. Salaries and pensions account for 12 per cent of the governments total expenditure.

The government has virtually no discretion over its expenses on any of these four items, which means it can play around with only 40 per cent of its total annual expenditure. In other words, Mr Mukherjees Budget exercise on the expenditure side will be limited to a little more than a third of what the government will be spending next year.

With such limited scope for tax rate changes and major expenditure restructuring, is it any surprise that there is so little hype and expectation around the Union Budget for 2010-11? In addition, has the annual Budget exercise become one of those historical legacies that need to be reviewed by the government? There was a time when the governments annual Budget Speech would be presented to Parliament at five pm. That too was a historical legacy and Yashwant Sinha cast it aside in 1999. With tax rates becoming stable and expenditure allocations predictable, Mr Mukherjee may consider introducing an open Budget system, with less secrecy and more consultation even as the Budget proposals get framed and then approved by Parliament.

 
 
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