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India: Revenue-Buoyancy to Guide Fiscal Consolidation

India: Revenue-Buoyancy to Guide Fiscal Consolidation

This year's union Budget, more than being a flagship event of India's economic calendar, could well turn out to be an event of recent times considering a eclectic mix of experts assisting the Finance Minister (FM). The FM set to present his sixth Budget, has relied on a battery of experienced academicians, technocrats and bureaucrats to put together fine prints for addressing host of competing issues on (political) stability, growth and common man's issues.

Fiscal deficit ghost chases India
Riding on buoyed revenue collection in 2010-11, the Budget will surely target fiscal consolidation. The macro-economic statistics suggest that the economy may grow at 8.7 percent (against 7.4 percent last fiscal) despite marginal deceleration in the last two quarters of the current fiscal. Though, the fiscal deficit for the current year pegged at 5.5 percent of the GDP, the fiscal gap in absolute numbers may not come down with the end of Q4 and the overall deficit may settle marginally below 5 percent, given the higher GDP base.

Most economists believe that the fiscal deficit is still alarming, especially considering that 13th Finance commissions recommendation (released last year) that suggested the Government should aim to contain fiscal gap at 4.8 per cent for 2010-11 and graduate to 3 percent in 2013-14. Clearly, achieving this target shall call for credible measures of fiscal consolidation, especially in current context when inflationary trends could pose roadblocks; hence, I am circumspect if this is ever achievable, leave alone the fact that we witnessed a deficit of 2.6 percent in fiscal year 2007-08. Given the delicate macro-economic landscape, the FM is likely to target the Revenue side of the Budget to curb the fiscal deficits, than tinker with expenditure such as subsidies and increase in public expenditure.

India, however, desperately needs a medium to long term policy on fiscal consolidation requires the government to improve the quality of public expenditure. Much as the effectiveness of the RBI's monetary policy hinges on the success of such measures, it is not surprising that recent attempts of the RBI to curb inflation have not borne desired outcome.

Proposal to stimulate tax collections
The FM shall expect to continue trends in tax and non-tax collections. Disinvestment, the other big kitty targeted in recent budgets, could only give so much in 2011-12, with big tickets disinvestments of ONGC, SAIL and PFC lined up over the next six to twelve months. With the investment climate being unfavorable and hence reduced appetite for Indian stocks, the Government could re-think over its disinvestment strategy. Clearly, the management of fiscal gap therefore, would need to turn its hopes to tax revenues in short to medium term.

Going by current year's tax collections trends any increase in tax rates could be a negative approach to realising fiscal consolidation objectives. Total tax collections in 2010-11 are likely to exceed budget estimates by Rs 37,000 crore. I would rather believe that the FM would seek to broaden the compliance discipline to enhance revenue collections, than taking chances with the equilibrium of tax rates.

Yet, there is wish list!
Unlike past Budgets, trade & industry's expectations on tax holidays is muted and rather hovering around alignment of tax regimes with impending tax reforms on DTC and GST. Whilst the Government has pledged its commitment to these reforms, realistically, there is need for clear roadmap on introduction of and subordinate ones.

On direct tax front, we could see incentives to education and healthcare sector, particularly for investments in backward areas. IT/ITES industry would look for extension of tax breaks till 2014, allowing level playing field under the DTC. The Budget may also provide a flip to the energy sector, by extending tax holiday for natural gas production in blocks under 9th round of BELP as committed in road-shows.

From an administration perspective, the FM would be cogni-sant of the need to tighten the noose around the instituionalised dispute resolution forum. The administration of DRPs could witness legislative amends to make the authority effective. On policy front, the banking and financial sector is upbeat the FM shall anno-unce roadmap for fresh banking licence, and possible interest inc-ome sops for infrastructure financing.

One can anticipate a high deg-ree of rationalisation in the extant indirect taxation regime, espec-ially from a GST transition viewpoint. It is likely that the Cons-titutional Amendment Bill on GST will be introduced, smoothening the way for roll-out of GST by April 2012. The amendment shall facilitate reciprocity of rights to tax goods and services by both centre and state. A separate central law on GST council could well bury the debate between centre and state on GST. It is likely that the Budget speech may lay out roadmap to GST roll-out and fine contours including states' consensus on tax rates, centre-state revenue sharing formula, etc.,

The FM may like to tweak the extant indirect tax regime by ali-gning tax rates and prune exemptions /concessions on service tax, excise and customs. Rate of Central Sales Tax may be halved to 1 per cent, and if the FM has his way, he would like to increase the median excise duty and service tax rate to 12 per cent from 10 per cent. Though, I see that as unlikely give the inflation worries. It is likely the additional duty of customs (4 per cent) on import of goods may be withdrawn, given that non-creditable nature of ACD distorts the credit mechanism in the supply chain for non-manufacturers.

It is certain that the service tax net shall be widened to include new services; the question is whether widening tax net could hurt essential services, ie utilities, insurance, education and healthcare.


Taxand's Take

The Budget 2011 would be more than ordinary, much of which shall be on account of the inflection point the Indian economy is witnessing. I would believe that the FM would be wary of not taking a risk to disturb the pace of economic recovery and sustained growth, especially when the world economies continue to wriggle their way out of downturn. The overall guiding principle would be to sustain growth, with credible measures for prudent fiscal consolidation.

Indians are eagerly watching out for this space!

Your Taxand contact for further queries is:
Mukesh Butani
T. +91 124 339 5010

First published in the India Business Standard column 21 February 2011

Taxand's Take Author