[Economic Survey Ch3] Fiscal Marksmanship, Tax Buoyancy, 14th Finance CommissionDevendra Vishwakarma
- What Is Fiscal Marksmanship?
- Why Poor Fiscal Marksmanship?
- Steps taken in Budget 2012-13
- #3: GAAR (but delayed)
- #4: SERVICE TAX: negative approach
- Issues: Tax Buoyancy
- Issue: COLLECTION RATES
- Issue: Non-Tax Revenue
- Issue: SUBSIDIES
- Public debt
- 14th finance commission
- Background: why finance Commission?
- Finance Commission: structure
- Terms of reference
- Way ahead?
- Mock questions
- We know that when Government spends more money than it earns= leads to fiscal deficit and high level of fiscal deficit = bad for economy. For more details, read the earlier Vijay Kelkar article click me
- Chapter 3 of economic survey, deals with these issues of public finances and deficits.
What Is Fiscal Marksmanship?
- This is a new term introduced by Economic survey.
- Marksman= an expert shooter.
- Suppose Government decided that for the given year,
- our direct tax collection target is xyz cr.,
- our indirect tax collection target is xyz cr.,
- our subsidy bill will be xyz cr.,
- our fiscal deficit will be xyz cr….these are all “targets” set by Government.
- For the moment, let’s concentrate on the fiscal deficit target.
- From the earlier articles, you know that high level of fiscal deficit is bad for economy. So in 2003, Government had enacted an act called “fiscal responsibility and budget Management (FRBM) Act”
- This FRBM act stipulated that Government will reduce its fiscal deficit.
- The original “target” was that fiscal deficit should be only 3% of the GDP for the year 2008-09. And similarly Revenue deficit should be 0% of the GDP for the year 2008-09.
- But actually for 2008-09 the fiscal deficit around 6% of the GDP! (instead of the target of 3%)
- That means, Government’s gunman (finance minister) fired a bullet but instead of hitting 3%, it hit 6%. That means Government’s fiscal marksmanship was poor (because they can’t hit the target precisely).
- Now the question comes in mind.
Why Poor Fiscal Marksmanship?
- How can Government overshoot the (fiscal deficit) target? Well, fiscal deficit will happen when Government’s outgoing money is more than its incoming money.
- Recall that in 2007, subprime crisis happened in USA and its shocks were felt on every country, including India: export declined, business activity declined….So, Government had to take some initiative to protect Indian economy from further damage.
- Therefore Government decreased excise duty, decreased the service tax + offered many tax incentives to businessmen, to boost demand of Indian products and services within India and abroad. (=incoming money of Government reduced).
- Thus, Government missed the “Revenue collection target” (first proof of poor fiscal marksmanship.)
- On the other hand outgoing money was high because
- MNREGA and other welfare schemes. (+ the lot of that money didnot go to actual poor people. so such schemes didnot show the desired positive result on the economy.)
- Subsidies on petrol, diesel, LPG, Urea etc.
- Since 2009’s general election was coming, so Government wanted to woo the farmers. So it gave debt waiver to farmers = again outgoing money increased. Government increased minimum support prices (MSP) to farmers for sugar, wheat etc. In other words, Government overshot (missed) the “expenditure target” (second proof of poor fiscal marksmanship.)
- And since Government already missed the first two targets (Revenue collection and Expenditure) so obviously third target (fiscal deficit) was going to be missed.
- Thus in 2008-09 Government could not show its sharp / precise / accurate “fiscal marksmanship”.
- To put this concept in refined words= Government overshot the deficit targets in 2008-09 to obviate the adverse impact of the global financial crisis and to give largesse on the eve of the 2009 general elections.
- Anyways ^that was the story of 2008-09, but even in 2011-12, Government was showing signs of poor fiscal marksmanship because
- Policy paralysis in last two years. Combine this with slowdown in Europe=our (export) sector is not performing good, GDP is going down, low IIP=> low tax collection.
- Disinvestment targets could not be met because market’s response was lukewarm. (Meaning Government wanted to sell its shares of some PSU but private players were not interested in buying them @high price).
- Inflation continued to be above 7 per cent=again higher subsidy payments, lower tax collection.
- high inflation = people opting for gold-purchase as “safe-investment” + high crude oil price= CAD increased = rupee weakened against dollar= even more inflation= profit of businessmen declined = less tax collection.
- In earlier years, Government could make truckload of money through proper auctioning of spectrum and coal mine licenses, but both were ridden with scams and corruption. So when Government tried to auction 2G again in the late 2012 (after supreme court’s order), private players weren’t much interested.
- Controversies surrounding Vodafone case and GAAR implementation = foreign players felt less confident investing in India.
Lately Government has woken up and started firefighting: the increasing of petrol-diesel prices, decreasing number of subsidized LPG cylinders, increasing FDI limits in multibrand retail, insurance, aviation, increasing the railway ticket prices, direct cash transfer……these are all measures to decrease the fiscal deficit (=achieving fiscal consolidation).
anyways back to the story:
Steps taken in Budget 2012-13
- In Budget 2012-13, FM announced that Government will restrict expenditure on central subsidies to under 2 per cent of GDP. (meaning if India’s GDP was 100 billion rupees, then Government will only spend 2 billion or less on various central subsidies on petrol, diesel, urea, PDS).
- FM introduced the concept of “effective Revenue deficit.” = Revenue deficit MINUS grants given to states for creation of capital assets. (this means technically, “on paper”, Government’s Revenue deficit will look smaller!)
#3: GAAR (but delayed)
- GAAR was already discussed in earlier article, click me
- This was #EPICFAIL, because led to huge protests from business lobby. Government setup Shome Panel to look into GAAR. Shome says, “delay GAAR implementation till 2016”. Chindu agrees.
#4: SERVICE TAX: negative approach
- Usual approach is: Government would say the service tax on xyz item is xyz%.
- But in 2012-13: Government introduced a new approach “negative list”. Here, Government would say “xyz items are exempted from service tax payment”(e.g. doctor, lawyer)= It means service tax applies on all the remaining services that are mentioned in the “Negative list”.
- Service tax=12%* on all services that are not included in the negative list. (rate is same for both 2012 and 2013’s budget)
- Government also implemented service tax on railways (first class or an air conditioned coach) from 1st October 2012.
*By the way service tax is 12% but some books/material/websites might say service tax is 12.36%. WHY?
Because they include cess on the service tax.
|2% educational cess. Meaning tax on tax = 2% of 12%||+0.24|
|1% Senior & Higher Education Cess= 1% of 12%||+0.12|
|Effective service tax||=12.36%|
#5: IT in IT
- To increase the tax collection, Government is making extensive use of information technology is continuing, viz. along with e-filing of income tax returns, various forms, audit reports, and statements of tax deduction at source have been made compatible with electronic filing and computerized centralized processing. This helps checking tax evasion and black money.
Issues: Tax Buoyancy
- A tax is buoyant when revenues increase by more than 1 per cent for a 1 per cent increase in GDP.
- After the FRBM act, both direct and indirect taxes remained buoyant except in the crisis years (2008-9 and 2009-10).
- But in 2011-12, the tax buoyancy declined sharply in corporate tax sector. Because high level of inflation decreased the actual profits of corporate sector.
Issue: COLLECTION RATES
It is the ratio of revenue collected from imported items vs the value of imports in a year. Collection rates have decreased last year because
- petroleum, oil, and lubricants (POL) are expensive in terms of value but Government is levying lower levels of duties on them.
- Tax exemptions are given on various imported items.
Issue: Non-Tax Revenue
- Last year, Government couldn’t get sufficient “incoming” money from non-tax Revenue sources because
- Market gave lukewarm response to disinvestment.
- Government was expecting to auctions of telecom spectrum and phase III FM Radio for around 15,000 cr. But it did not work out.
- As the 2G telecom spectrum auction elicited lukewarm response on account of the high reserve price.
- The Budget for 2011-12 had estimated total expenditure to be contained at 14.0 per cent of GDP but Government also overshot this target due to high global oil prices and subsequent increase of subsidy bill (for oil and fertilizers) = another example of poor fiscal marksmanship.
- Government should give priority to food subsidy due to extent of malnutrition in the country.
- The government aims to do this via National Food Security Act.
- But there is also need to reduce leakages involved in subsidy delivery= Government aims to do this via Direct benefit transfer (DBT) / direct cash transfer.
- It is further classified into internal (domestic) and external debt
- Internal debt makes up around 91 per cent of public debt.
- State governments are not allowed to directly borrow externally hence their entire debt is domestic.
14th finance commission
Background: why finance Commission?
- India is a quasi-federal country.
- We’ve union Government, we’ve state Government.
- Both have their “De Jure heads” (President vs Governor),
- Both have their “De Facto (Real) heads” (PM vs CM)
- Both have their separate administrative machinery (central service employees vs state service employees)
- Both have their taxation powers and so on…
- Point is: Taxation power of state Governments is limited. Majority of taxes paid by the public goes to the Union Government via income tax, corporate tax, service tax, excise duty.
- So if the Union did not give even single paisa from its pocket to the states, then state Governments cannot survive. (because state Government also need to pay salary to staff, public amnesties and interest on previous borrowings.)
- Therefore, Constitution of India mandates that Union has to share some of its taxes with the states.
- But who will decide how much tax money must be shared between union and the states? Ans. Finance Commission. (for more, read financial relations on pg 13.8 to 13.13 in Laxmikanth).
- Under art. 280, President sets up this Commission every 5 year.
|14th||Y.V.Reddy, Former RBI Governor||2015-20|
Finance Commission: structure
- 1 chairman + 4 members.
- 1 Chairman = experience of public affairs
- 4 members need to have following qualifications
- Serving or retired judges of High Court, or someone who is qualified to become one
- knowledge of Government finances or accounts, or
- experience in administration and finance.
- Special knowledge of economics.
Terms of reference
The 14th finance Commission will look into following matters
- Distribution of certain taxes between union and state.
- What principles should Union follow while paying grants-in-aid to states? (from the consolidated fund of India)
- What measures should be taken to augment the Consolidated Fund of a states so they can help the panchayats and municipalities.
- Review the state of finances, deficit, and debt levels of the union and states
- Give suggestion to maintain a good fiscal environment and equitable growth.
- Give suggestions to amend the FRBM Act.
- How much money should be spent for the maintenance of capital assets
- How to monitoring ^such expenditure?
- Should Government insulate the pricing of public utility services like drinking water, irrigation, power ,and public transport via through laws?
- How to make public-sector enterprises competitive and market oriented;
- Matters related to Disinvestment
- Should Government giveup non-priority enterprises?
- Climate change, sustainable economic development
- What will be the impact of the proposed goods and services tax (GST) on Centre and State?
- Will GST implementation lead to Revenue loss to States? If yes, then how to compensate that loss?
- How to arrange money for disaster Management related activities?
Prolonged fiscal deficit leads to
- higher real and nominal interest rates,
- slower growth in capital formation
- potentially lower the rate of output growth.
Therefore Government must stick to the fiscal targets. Although, Government cannot rapidly reduce its outgoing money (expenditure) because
- Government has to pay interest on earlier borrowings
- Continued payments on defense, civil service pay and pensions, etc.
Thus the annual budget has to maintain a delicate balance between
- Non-developmental Expenditure that is necessary.
- development expenditure for inclusive growth.
Q1. What is the correct equation of effective revenue deficit?
- Revenue deficit MINUS grants for creation of capital assets.
- Revenue deficit PLUS grants for creation of capital assets.
- Primary deficit plus fiscal deficit.
- Fiscal deficit MINUS Revenue deficit.
Q2. Find Incorrect statement(s) about service tax?
- The service tax rate was 12% for 2012-13 and increased to 12.36% for 2013-14.
- Railways is exempted from service tax.
- Service tax is levied on the items listed in the negative list.
- All of above.
Q3. Find Incorrect statement(s) about Finance Commission
- The time frame for 14th finance Commission is from 2010-15
- It has 1 chairman and 3 members.
- One of the member must be a serving or retired judge of Supreme Court.
- All of above.
Q4. Find Correct statements
- Major portion of India’s public debt is financed from external sources.
- The debt of all state Governments is internal.
- Only 1
- Only 2