Mr Jaitley; So much for tax simplification and fiscal consolidation - Outside View by Arvind Chari

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Mr Jaitley; So much for tax simplification and fiscal consolidation
Jul 9, 2014

I am sure you are tired and bored of reading all the 'experts' suggestions on what Jaitley's budget should contain. Almost all of them would have suggested

A)  Cutting Subsidies    B)  Fiscal Consolidation and  C)  Tax Rationalization

All pertinent points and much needed from a policy perspective. The table below summarizes why they say so. India's tax revenues as a % of GDP are amongst the lowest in the world. Take this data for eg: Less than 40 million Indians filed Income Tax Returns. Agricultural income is not taxed and with it so are all the income from the 'farm houses' on the outskirts of Delhi. Average tax of corporates is 22% as against the stated 30%.

Fiscal Numbers as a % of GDPFY12FY13
Direct Tax Revenue5.40%5.50%
Indirect Tax Revenue4.40%4.70%
Total Gross Tax Revenue9.80%10.20%
Subsidies (food; fertilizer and fuel)2.30%2.40%
Fiscal Deficit5.70%4.90%

So, this has been the general commentary on India's fiscal situation. Lower economic growth has led to lower tax growth. And at the same time rising 'wasteful' subsidies has ensured that the fiscal deficit as a % of GDP has increased to the 5% mark. And so the suggestion; cut subsidies; reduce the fiscal deficit.

The table below shows that total tax foregone by the central government is almost as high as the fiscal deficit itself. i.e this is the amount of tax actually due to the government which was not paid due to the exemptions that the government provides.

What if as per the suggestion of the 'experts'; the government rationalizes and thus removes all tax exemptions provided to individuals and corporates on direct and indirect taxes; it could rid us of the entire fiscal deficit. If subsidies are bad; then the 'tax subsidy; enjoyed primarily by India Inc also needs to be looked at in the overall effort to reduce the fiscal deficit. Why burden only the middle class and poor?

Tax Foregone by Indian Government
as a % of GDPFY12FY13
Direct Tax Foregone (Corporate and Personal Income Tax)1.10%1.10%
Indirect Tax foregone (Excise & Customs)4.80%4.60%
Fiscal Deficit5.70%4.90%

So much for tax simplification and rationalization. Heard any 'expert' talk of this?

Arvind Chari is Head Fixed Income & Alternatives at Quantum Advisors Pvt Ltd and advises two India dedicated off-shore India fixed income funds. Arvind was previously the fund manager for the Quantum Liquid Fund and the Quantum Equity Fund of Funds at Quantum Asset Management Company Pvt Ltd.


The views expressed in the Article are the personal views of the author, Arvind Chari and not views of Quantum Advisors Private Limited (QAS). QAS may or may not have the same view and does not endorse this view. The views expressed here in this article are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument. Information sourced from third parties cannot be guaranteed or was not independently verified. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date.

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