International Seminar
Tax Reforms and Tax Administration
Inaugural address
by
C. Rangarajan
Chairman
Economic Advisory Council to the Prime Minister
December 8, 2012
Foundation for Public Economics and Policy Research
New Delhi
Tax Reforms and Tax Administration
by
C. Rangarajan
Chairman
Economic Advisory Council to the Prime Minister
I am indeed happy to be in your midst this
morning and to inaugurate this Seminar on Tax
Reforms and Tax Administration in India organized by
the Foundation for Public Economics and Policy
Research. I am all the more happy to note that this
seminar is being organized to commemorate the tenth
anniversary of this Institute.
At the outset, I congratulate the Director and the
staff of the Foundation on this special occasion. I
have looked at the progress report of the Institute and
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am very happy to note that they have done very well
during the first decade of their existence.
The theme of this Seminar is vital given the wide
range of tax reforms that have been initiated in India
since 1990s and continue to remain on the forefront of
the reforms agenda even today.
The tax reforms of the nineties set the stage for
achieving a higher tax-GDP ratio and this has helped
the country to achieve a higher level of growth. It has
focussed mainly on simplification and rationalization
of the rate structure; reduction in the high marginal
rates and the rate categories; reducing dispersion in
the tax rates; and lowering tax rates. Efforts have also
been made to rationalize the structure and scope of
tax incentives. The thrust has been on broadening the
tax base; improving the tax administration; and
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promoting fairness in the tax system to check adverse
effects on efficiency and neutrality.
To begin with, a wide range of reform measures
were
undertaken
on
the
basis
of
the
recommendations of Tax Reforms Committee headed
by Dr. Raja Chelliah. As a consequence, attempts
were made to moderate tax rates, widen tax base,
provide necessary tax incentives for development of
infrastructure
and
housing,
and
strengthen
tax
enforcement. In the case of indirect taxes, steps were
taken to reduce multiplicity of rates, rationalization of
the rate structure, and adoption VAT procedure in
union excise duty and sales tax.
Kelkar Task Force on Direct and Indirect Taxes,
and Shome Committee on Tax Policy and Tax
Administration for the Tenth Plan, have highlighted
that the factors responsible for low tax-GDP ratio
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relate to structure as well as to the administration of
the taxes. While it is recognized that the key to
restoration of fiscal health lies in attaining the
appropriate tax-GDP ratio, the path has not yet been
smooth.
After having risen sharply, in the recent
period, there has been a decline in this ratio which
needs to be reversed.
Owing to plethora of changes in the original
enactment of the taxes on income and property, their
structure has become very complex. The situation has
led not only to high administrative and compliance
costs but also significant distortions in resource
allocation. While efforts have been made to lower the
marginal rate and rationalize the structure, it is felt
that the strategy for broadening the base essentially
comprises of two elements. The first is to minimize
exemptions. The removal of these exemptions will
have three consequences: (i) it will result in a higher
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tax-GDP ratio; (ii) it will enhance GDP growth, since
tax exemptions and deductions distort allocative
efficiency; and (iii) it will improve equity (both
horizontal and vertical), reduce compliance costs,
lower
administrative
corruption.
The
burdens,
second
and
problem
is
discourage
related
to
ambiguity in the law, which facilitates tax avoidance.
Efforts have, therefore, been made to redraft the
overall income tax Act. The revised enactment known
as Direct Taxes Code (DTC) has already been
approved by the cabinet in August 2010 and is before
the Parliament.
The DTC would be a new law replacing the
existing income tax Act so as to establish an
economically efficient, effective and equitable direct
tax system which will facilitate voluntary compliance
and reduce the scope for disputes and minimize
litigation. It would be expressed in simple language;
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avoid ambiguity in the provisions that invariably give
rise to rival interpretations; would be capable of
accommodating the changes in the structure of a
growing economy without resorting to frequent
amendments;
and
would
consolidate
provisions
relating to definitions, incentives, procedures etc. It
would be based on well accepted principles of
taxation and best international practices.
Though the fiscal reforms at the Central level
commenced at the beginning of the nineties, the
States have moved strongly only in the last decade.
State-level
reforms
are,
however,
critical
for
accelerating growth in the country.
Reforms at State level took place in various
forms such as proposals relating to new tax and nontax measures aimed at strengthening the revenue
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base. Path breaking reform in State taxes was the
replacement of sales tax by State Value Added Tax.
The introduction of dual-VAT in India has been a
remarkable achievement in reforming the system of
commodity taxes both at the Centre and the State
levels. It helped remove cascading to some extent
and make business competitive. However, this was
only an intermediate step as the introduction of a
dual-VAT did not take care of all the deficiencies in
the system. Recognizing this, it is now proposed to
introduce GST to replace the existing dual-VAT,
service tax and some other commodity taxes levied
by both the Centre and State Governments.
Most of the arguments in favour of introduction
of the proposed goods and services tax(GST) in India
are centred around providing an expanded tax base to
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both the Union and state governments so that there
can emerge a stable tax regime with reliable revenues.
From what is known about the GST regime, in
terms of design, it is clear that the proposed regime
would involve two taxes, a central GST and a State
GST. Alongside, it is proposed that all inter-state
transactions will be taxed through a destination based
levy called IGST. These taxes would cover all goods
and services, except those explicitly exempted as in
the negative list for services. The rates of tax are still
not announced, but it is proposed that there would be
two rates for goods and one rate of tax applicable for
services. There are no decisions yet on the exemption
threshold for the tax, which is an important and
critical decision in order to understand the impact of
the proposed tax on the tax payers.
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In this context considerable efforts have also
been
made
both
by
the
Centre
and
State
Governments to create an appropriate institutional
structure for implementation. Major thrust has been
on creating an infrastructure of network known as
GSTN and on evolving suitable procedures for
smooth operation of GST. Also, the contentious
issues, including compensation to the States for the
loss of revenue due to reduction in the rate of CST,
and the issue of autonomy of States relating the
design of GST are nearing solution. It is hoped that
the GST legislation would be passed soon.
Notwithstanding a plethora of reforms attempted
in the last three decades, there is a need to take a
stock of all the reforms and take these reforms further
and make the tax system suited to a competitive open
economy and to have a unified Indian market.
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Further, the tax policy and tax administration are
intrinsically linked. Even when we have a rational tax
system, the manner in which it is administered is all
the more important. That is why it is well recognized
that “tax administration is tax policy.” Operations of
the tax i.e. how the tax is administered, what
procedures are followed etc. are crucial factors that
affect departmental performance. Higher tax yields are
directly a result of the efficient operations of the tax.
As a converse corollary, inefficient operation of tax
causes extreme inconvenience to taxpayers who
come into close contact with the Tax Department.
Criticism of the tax, therefore, stems largely from the
deficiencies in tax operations.
In fact, the desired objectives of a tax cannot be
achieved unless it is properly administered. Failure to
properly administer the tax defeats its very purpose
and threatens the canon of equity because only those
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who cannot avoid it make full payment of the tax.
Experience suggests that it is possible that the
administrative mechanism could alter the original
intention of tax policy and structure.
It is, therefore, very useful that this Seminar
concentrates both on the tax policy and on its
administration, wherein the administration is seen as
a fiscal measure. I am sure the presentations and
discussion on all the aspects would go a long way in
helping policy makers and administrators to draw
some lessons for further reforms.
Before I close, I would like to assert that a robust
tax system is the foundation of a successful economy
and a pre-requisite for sustainable growth. The
demands on the government are growing.
Public
expenditure as a proportion of GDP will continue to
grow for quite some time in a country like India. Public
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expenditure as percentage of GDP for India stands at
25.73 per cent as compared to 42.68 per cent of OECD
countries. To meet the
rising expenditures, it
becomes imperative that the tax-GDP ratio must
continue to rise.
We need to strike an appropriate
balance between modest tax rates and the need to
raise revenue. With a view to making the Indian tax
regime robust, I propose a few action points which
can help improving the investment climate in the
economy, so crucial to reviving growth:
The tax system should be as much as
possible stable in the short run. Forward
looking changes should be made in the
medium term.
As far as possible uncertainties in tax policy
should be minimized at least in the short
term. The investor should be confident
enough that no sharp changes are likely to
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be there at least during the implementation
period of the project. For example, the
investors, whether
domestic or foreign,
should be sure that the tax rebate on greenfield projects, environment savers, export
related
incentives,
and
backward
area
concessions would not be changed. Sunset
clauses, if any, need to be explicit.
Given the nature of Indian federal structure
any tax policy enunciated by the Centre must
ensure that there is no adverse impact on the
finances
of
the
States.
Harmony
and
coordinated efforts in tax reform are crucial
to overall growth of the economy.
The specific purpose taxes or levies should
be utilized only for the purpose for which
these are levied. This is important to provide
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confidence to the taxpayers that the govt
indeed deserves to collect such taxes. This
is illustrated through the education cess
levied by the Centre Government.
It
needs
to
be
emphasized
that
the
administration of taxes should be such that it
reduces the interaction of taxpayers with the
department
considerably.
The
taxpayer
should not at all visit the tax department,
unless called to do so. Tax procedures
should be as automated as possible so that
the corruption does not find any place in the
tax administration.
Finally, while the introduction of GST in the
indirect tax system of the Union and the
State Governments and the DTC in the direct
taxes of the
Union Government would
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establish an economically efficient, cost
effective and transparent tax system, the
other taxes at the State level need to be
further reformed. Reforming these taxes
would make the Indian tax system suitable
for taking the country to higher levels of
growth.
I am sure these and other issues will be
addressed in full in your deliberations. I wish the
Seminar all success.
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