T N Ninan: Budgets - the long view

The flood of commentary that follows the presentation of a Union Budget focuses quite naturally on the immediate numbers. However, it is the long view that often proves more educative. Taking the perspective of the last decade, budgetary numbers present some clear trends. To start with, central tax revenue and GDP will have remained in lock step: GDP (at current prices) is expected to have grown 3.4 times over the decade to 2016-17; so is budgeted tax revenue for next year. However, the states’ share of this revenue will have multiplied 4.7 times, leaving net central tax revenue to grow barely three-fold — and therefore slower than GDP. That the fiscal deficit has been controlled, regardless, is because of the spectrum bonanza that the government has engineered.

The contribution of different taxes to the total tax kitty has seen changes. Income-tax revenue is budgeted to have grown significantly faster than GDP, multiplying 4.3 times over the decade. Since GDP has grown only 3.4 times, people are now paying a greater share of their income as tax. Companies have not been as generous — corporation tax revenue is budgeted to have grown at nearly the same speed as GDP. Don’t blame the companies, though. The stress in the corporate sector has caused the share of profits in GDP to drop to a low point. If companies start doing better and reporting profit growth, corporation tax revenue will see a boost, not just in absolute terms, but also in relation to GDP.
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Among indirect taxes, the star performer is service tax, whose revenue next year is budgeted to be a massive six times greater than a decade earlier. This is not just because service tax rates have been raised, but also because the coverage of the tax has been expanded. However, the other indirect taxes have disappointed. Customs duties, for instance, are budgeted to grow next year to just 2.8 times the level a decade earlier. This could indicate that duty rates have been dropped, making the economy more open than before, or that there has been a change in the import mix, towards items that attract lower duty. Alternatively, more imports are duty-free because they feed exports. Whatever the reason, the collection rate for Customs duty has dropped to barely 8 per cent of total imports in the last full year, compared to about 9 per cent of imports a decade earlier.

Finally, there is the other underperformer, excise duty. Revenue from this is budgeted to grow next year to just 2.7 times the level a decade earlier — making it the slowest-growing tax item, and growing slower than GDP, although the share of manufacturing in GDP has not fallen. The primary reason for the slippage is probably the fact that excise duties were lowered in the wake of the financial crisis of 2008, and are yet to be taken back up to the level that prevailed earlier. Perhaps finance ministers have stayed their hand because imposing higher excise duties might affect already depressed demand for a range of goods.

What conclusions should one draw from these numbers? First, the faster growth of revenue from direct taxes (on income and corporate profits) is to be welcomed as it makes the tax system more progressive. That customs duties are growing slower than both GDP as well as imports is also to be welcomed, if it can be confirmed that this is because duty rates have dropped and made the economy more open. However, the fact that taxes on manufacturing are growing slower than GDP should cause concern. Overall, the government’s total expenditure in relation to GDP is the same as it was a decade earlier. This tells us that, for all the excitement over annual budgets, finance ministers have little leeway for introducing change until the share of taxes in GDP grows. That will happen when the economy recovers momentum — corporate profits will grow and yield more taxes, and excise duty rates can be taken back to where they were before the 2008 crisis.

Source: http://www.business-standard.com

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