Within gross tax revenue, excise increases by a modest 11.04 per cent, customs by 20.75 per cent, corporation tax by 14.95 per cent, income tax by 19.71 per cent and service tax by 31.52 per cent. Barring service tax, there isn’t any great tax generating effort. If one were to extrapolate finance ministry’s 2004-05 revenue forgone estimates to 2007-08, the tax/GDP ratio could have been 17 per cent instead of 11.4 per cent this time. However, that requires removal of concessions and exemptions. True, all exemptions can’t be scrapped. Customs duty waivers linked to exports will remain, as will SEZ policy. Given NCMP (National Consensus on Muddled Policies), no one should have expected big bang liberalisation. But one legitimately expected tax reforms, characterised by removal of concessions and exemptions. After all, by Chidambaram’s own admission, effective tax rate for the corporate sector is only 19.2 per cent. The answer doesn’t lie in extending Minimum Alternate Tax to the IT sector, but in wholesale removal of discretion. As the three Vijay Kelkar reports pointed out, tax policy shouldn’t be used to push investment, growth and employment in backward geographical regions (J&K and Northeast included) or selected sectors. These attempts are arbitrary, distort resource allocation and don’t necessarily promote equity.

The FM knows this, but has done it nonetheless. Here is a sentence from para 11 of the speech: “Among the other objectives of the Plan (11th) are growth of 4 per cent in the agriculture sector, faster employment creation, reducing disparities across regions and ensuring access to basic physical infrastructure as well as health and education services to all. I have kept these objectives in mind while allocating resources to various sectors.” That’s not what you do if you believe in the tax reform agenda. Incidentally, the impact of concession removal for the IT sector shouldn’t be blown out of proportion. Such units can move to SEZs, this particular exemption removal was on the agenda even otherwise and taxation only applies to the domestic component of services, not to overseas earnings.

Why was this exemption removal agenda ducked? There can be several reasons. First, with growth (manufacturing at 11.3 per cent, services at 11.2 per cent) and tax revenue performing well, why disturb the status quo and slow things down? Second, if one discards discretion, how can one introduce special programmes with catchy acronyms like Digitized E-governance Across The Heartland (DEATH)? MPs and citizens at large expect these. Without them, Part A is knocked out of the budget speech and all suspense and mystery is lost.

Third, every FM loves discretion and sense of power that comes with it. Thus, dog and cat lovers need to be treated differently from pig lovers. If tax rates become standardised and unified, who is going to go to North Block to lobby? While applauding reduction in peak manufactured basic customs duty to 10 per cent, ask yourself why the duty on rough synthetic stones should be 5 per cent, while that on un-worked corals is 10 per cent. There are several such examples on customs and even excise, where all rates (including services) should converge to 16 per cent. Instead, we have discretion, the really perverse instances being the linking of excise to retail prices, for biscuits and cement. Because we won’t push up tax/GDP ratios through removal of concessions and exemptions, we search for taxes counter to the tax reform agenda — dividend distribution tax, fringe benefit tax and banking cash transaction tax are examples. Consider FBT. Fringe benefits aren’t income, they are expenditure. One taxes individual income, not collective expenditure.

We will be told that New Zealand taxes fringe benefits, the distinguishing feature of that country being it has more sheep than people. But we won’t be told that no country that taxes perquisites taxes fringe benefits. Stock options will now be taxed under FBT. How do stock options represent collective corporate expenditure? Admittedly, there is tax fatigue in India, understandable because taxes go into the black hole known as the Consolidated Fund and there is little accountability on how that revenue is spent. The education cess is a case in point. There is a suggestion that the earlier 2 per cent cess was for school education and we now need 1 per cent more for secondary and higher education. Not true. The earlier cess was meant to be split in 50/50 ratio between school education and the rest and with the Centre’s contribution in the Sarva Shiksha Abhiyan declining from 75 per cent to 50 per cent, no additional cess should have been necessary. This budget has several measly items of public expenditure (focused larger expenditure on a smaller menu would have been better), but there is nothing on improving efficiency of expenditure. There is nothing on bang for the buck. This budget too, has buck, but no bang.

The writer is an economist