Cut income tax slab, abolish FBT
Yashwant Sinha June 30, 2009
The biggest challenge before the new Finance Minister is reining in the bloated fiscal deficit, the bulk of which is actually revenue deficit. All the targets of FRBM Act have been missed and we need to set new targets for fiscal and revenue deficits. The overall fiscal deficit, taking into account the off-budget liabilities and the position of the states, is a high 13-14 per cent. Clearly, the FM will have to attempt to boost revenues while curtailing expenditure.
In the midst of the economic slowdown, it’s not easy to boost revenues. The FM does not have the option of raising or levying new taxes. The only option left is to focus on better compliance for which it’s very necessary that determined efforts should be made to simplify the tax structure. This means avoiding the multiplicity of rates and a tax payer friendly administration.
Let’s begin with direct taxes. I would go for a more moderate tax rate structure. For personal Income Tax, I would only keep two rates - 10 and 20 per cent. The government should also link the income tax slabs and the taxsaving limits automatically to inflation. In corporate taxes, all surcharges should be abolished and the tax rate should be 10, 20 and 30 per cent. To encourage voluntary compliance, I would reintroduce the one page Saral form for income tax payers.
In indirect taxes, I believe the early implementation of a Goods and Services Tax (GST) will be a fundamental reform in the federal tax structure and give a fillip to revenues. However, there are matters of detail to be sorted out if it is to be implemented by April 1, 2010. It will require the personal attention of the Finance Minister.
I also advocate that the government do away or restructure some of the existing taxes to spur economic growth. Consider the Fringe Benefit Tax (FBT), Banking Cash Transaction Tax (BCTT) and Securities Transaction Tax (STT). The first two should be abolished. The third should be replaced by another kind of arrangement.
The government must also demonstrate that it’s serious about expenditure control and expenditure reforms. I would have implemented the recommendations of the Expenditure Reforms Commission set up during my term as FM under the NDA government. Among its major recommendations was a reduction in the number of posts in every ministry which could not be implemented because of stiff resistance from various ministries. The government could also consider the recommendations of the Fifth and Sixth Pay Commissions aimed at improving the efficiency of public services. In addition, the PM should issue an austerity circular. For five years, the government has splurged. This must be brought to an end.
As for non-plan and revenue expenditure, they must be contained within the budgetary allocation. Any increase should be accommodated through internal adjustment. In no case should the allocation be increased through revised estimates.
The government has to be careful about designing and implementing social sector schemes, otherwise they become bottomless pits as the NREGA has become. Take the example of the proposed National Food Security Act. Here, it’s important that, going by whatever definition you have of BPL families, a strict survey is made of the number of families entitled to get the relief. Otherwise, there is a tendency by states to inflate the numbers. Subsidies, too, have to be better targeted. I’ll strongly advocate direct cash transfer to beneficiaries.
Yashwant Sinha is a former finance minister of India.