Go ahead and bundle
The 13th Finance Commission is understood to have recommended that the government switch to a three-year rolling budget to bring stability to tax rates.india Updated: Jan 05, 2010 22:02 IST
The 13th Finance Commission is understood to have recommended that the government switch to a three-year rolling budget to bring stability to tax rates. The suggestion, in response to an added term of reference on the Centre’s fiscal viability in light of mounting subsidies, is not exactly novel. Tax reforms in India owe a lot to V.P. Singh who, as finance minister in 1985, articulated the concept of a long-term fiscal policy that would freeze taxes over a five-year term. And by switching to a universal value-added goods and services tax — again V.P. Singh introduced value-added tax credits to India in 1985 — stability of tax rates will be ensured irrespective of the periodicity of the budget. The latest Finance Commission’s reported recommendation is nevertheless heartening because it shows good ideas do not completely die out in India’s administrative quicksand.
There has been no significant change in direct taxes since 1997 when P. Chidambaram brought rates on a par with the civilised world. With a new code being drafted, income and corporate tax rates will be frozen further as a jungle of exemptions are phased out from 2011. In indirect taxes, the continuing theme from V.P. Singh’s pioneering attempts has been a somewhat halting journey towards a unified value-added rate for goods and services. Since Indian states started taxing sales on value-adds in 2005, they have felt no compulsion to raise rates. This experience is likely to be repeated with a unified tax where the rate at which no revenue is forgone, once arrived at, should remain fixed for the medium term. This stability is further ensured by requiring states’ concurrence for future increases.
Where a rolling budget makes its need felt is in the notoriously unstable government expenditure management. Three-year budgeting can capture more accurately capital and revenue expenditure over the lifecycle of a project than any annual exercise can. Mature economies — whose governments do not have to undertake even a fraction of the capacity building India needs in infrastructure — have some or the other form of rolling budget. India’s budget-making is a fairly exact science from the revenue side — assumptions about economic growth and prices hold while tax rates do not jump about too much. The smoke and mirrors skills are on display in spending.
If a rolling budget can expose sleight of hand here, we can only urge that it be adopted at the earliest.