Tax the rich, Mr Finance Minister
A particular facet of the Union Budget for 2010-11 which has attracted relatively little attention is that Finance Minister Pranab Mukherjee has reversed a salutary trend in the pattern of tax collections of the central government. Over the recent past, more and more direct taxes were being collected instead of indirect taxes resulting in the share of the former in the government's total tax revenues steadily rising. The Budget has altered this trend. Moreover, the government could clearly do much more to raise revenue by extending the service tax net to wealthy doctors and lawyers.
Direct taxes such as personal income tax and tax on the profits of corporate entities are considered “progressive” since such taxes impose a greater burden on the rich who have a higher capacity to pay. Indirect taxes like excise duties and customs duties, on the other hand, are “regressive” by their very nature because these do not discriminate between taxpayers. Thus, indirect taxes are paid by all sections of society irrespective of their economic status, i.e. whether the person paying the tax is affluent or underprivileged. This Budget assumes that a higher proportion of the government's revenues would come from indirect taxes rather than direct taxes. The Finance Minister's tax proposals for direct taxes for 2010-11 will result in a revenue loss of Rs 26,000 crore while his tax proposals relating to indirect taxes will result in a net revenue gain of Rs 46,500 crore (most of it coming on account of excise and customs duties on diesel and petrol). Despite increasing excise duties and the minimum alternate tax on corporate profits, the government continues to be generous to industry. The “statement of revenue foregone” that is circulated as part of the Budget documents, indicates that the revenue that was foregone by the Union government (on account of various exemptions and concessions given to companies) jumped from Rs 4,58,516 crore in 2008-09 to Rs 5,40,269 crore in 2009-10. As a proportion of aggregate tax collection, this figure went up from 68.6 per cent to 79.6 per cent. The quantum of the revenue foregone can be gauged from the fact that the country's gross domestic product was roughly Rs 65,00,000 crore in the current financial year and is projected to rise to more than Rs 69,00,000 crore in the coming fiscal year. This means the revenue foregone by the government is around 12 per cent of India's GDP.
It is common knowledge that whereas the service sector is the biggest sector of the Indian economy (bigger than industry and agriculture), it contributes comparatively little to the exchequer by way of taxes. Former Chairman of the Securities and Exchange Board of India and the Disinvestment Commission, G.V. Ramakrishna, argues that if the Finance Minister was really serious about reducing the fiscal deficit, he should impose service tax on certain categories of service-providers, notably, doctors and lawyers.
He points out that under “legal consultancy services” provided by individuals are exempted from service tax. If corporate legal entities are taxed, why are individuals who provide the same services kept outside the tax net? If barbers and beauticians can be taxed, why not lawyers, he asks. Another glaring anomaly is with regard to the medical profession which is wholly excluded from the service tax net. Doctors who serve the poor earn little or no income by providing their services, but this is hardly the case with five-star doctors who earn huge amounts. Lawyers who provide their services for free to poor litigants need not be placed in the same category of taxpayers as those who earn in lakhs of rupees each time they appear in court.
The Finance Minister has been generous to less than 3 per cent of the country's population that pays personal income tax. The retired bureaucrat, Mr Ramakrishna, calculates that the government could earn as much as Rs 10,000 crore a year by taxing these two kinds of professionals alone. Is Pranab-babu listening?
(The writer is an educator and a journalist with 30 years' experience.)