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Fiscal and social balance can go together - Outside View by S.S. TARAPORE
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Fiscal and social balance can go together
Feb 23, 2015

The Budget should do away with sops that favour the well-heeled. This will reduce inequalities

According to an Oxfam study, the world over, there is glaring iniquity: one per cent of the population that accounts for almost 50 per cent of the wealth. Despite all intentions to undertake welfare measures, oligarchs rule the world.

It is commendable that the present government in India is trying to make the budgetary process more inclusive and less iniquitous. Economists in India are doing a disservice to the country by arguing that it would be in order to increase the gross fiscal deficit (GFD) beyond the consolidation path of 3.6 per cent of GDP in 2015-16.

The indicator of the GFD to GDP ratio is misleading as small variations in GDP alter the ratio significantly. A better indicator would be to target to reduce the ratio of GFD to total budgetary expenditure in 2015-16 from 30 per cent to, say, 25 per cent. Reducing iniquities while containing the fiscal deficit is a herculean task and as such there has to be great finesse in blending reducing taxation and curtailing non-merit expenditure.

As such, indiscriminate reduction of taxation has to be avoided. In this context, here are a few suggestions.

Basic IT exemption limit

It is often argued that the number of persons in the income tax net should be increased; therefore, there is opposition to raising the basic exemption limit. The answer is to bring persons with high incomes from agriculture, company dividends and clubbing of incomes of married couples within the income tax net while reducing iniquity by raising the basic exemption limit by a modest amount. Accordingly, the income tax exemption limit for those below 60 could be raised from Rs. 2.5 lakh to Rs. 3 lakh and for those over 60 years but below 80 from Rs. 3 lakh to Rs. 3.5 lakh. For those aged 80 or over, the present exemption level of Rs. 5 lakh could be left unchanged. However, an intermediate category could be introduced of those who are 70 but below 80 with an exemption limit of Rs. 4 lakh.

There are suggestions that the 80C deduction should be enhanced from Rs. 1.5 lakh to Rs. 2 lakh. 80C exemption is a major loss of revenue. Moreover, the present exemption works to the benefit of the higher income tax bracket; the exemption is equivalent to a taxable yield of 16.9 per cent, which is very costly to the government.

A more equitable system would be to provide a taxable instrument with a substantially higher rate, say of 15 per cent. This would not be agreed to as it would sharply push up the entire interest rate structure. A more equitable 80C structure would be to provide a deduction of 150 per cent for the first Rs. 50,000, 100 per cent for the second Rs. 50,000 and a deduction of 50 per cent for the third Rs. 50,000.

Some exemptions

At present there is an exemption from income tax up to Rs. 10,000 for interest on savings bank deposits. It would be more meaningful to provide for this exemption for interest income from savings bank as also term deposits

At present, dividends received by individuals are exempt from income tax but there is a Dividend Distribution Tax on the companies. This unlimited exemption is nothing short of a fiscal atrocity.

Given the power of the oligarchs, the government would find it difficult to totally withdraw this exemption. What is worrisome is that there are pleas to abolish the DDT. In fact, on the contrary, the present DDT of 16.5 per cent should be raised to 20 per cent. This would help recoup any loss of revenue from raising the basic exemption limit.

While bonds of public sector units (PSUs) are tax-free, income from investments in government securities is subject to tax. Moreover, dedicated gilt mutual funds are subject to DDT. This is tantamount to self-flagellation by the government.

If the government is serious about developing a gilt-edged securities market with depth and have participants with different needs for liquidity, it should make investments by individuals directly in government securities as also investments by individuals in dedicated gilt mutual funds free from income tax as also the DDT.

Non-merit subsidies

Non-merit subsidies such as on food grains and LPG should be tackled. The LPG subsidy is a totally ridiculous scheme. It is meaningless to have a market price which is charged to all consumers and then provide a subsidy to all consumers. Such non-merit subsidies need to be quickly phased out. Subsidy should be available only to the genuinely poor, that is, persons below the poverty line.

The government should restrict its investments in PSBs to be strictly equivalent to the dividends government receives from individual PSBs. This way the better run PSBs will grow faster and the poorer performers will grow at a slower pace and thereby PSBs as a system will strengthen. This would then release more funds for vital infrastructure projects.

 Please Note: This article was first published in The Hindu Business Line on February 20, 2015.

This column, Maverick View is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Freepress Journal, is titled Common Voice.


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