Missing The Big Picture

There is a sense of deja vu in the way the budget exercise ended recently with the adoption by Parliament of the Finance Bill. Finance Minister Pranab Mukherjee announced concessions with a monetary value of nearly Rs.400 crore, while moving the official amendments to the budget. Over the years, the concessions announced have typically been very small in relation to the overall size of the budget. Mr. Mukherjee has not departed from the practice of tinkering at the margin without offering substantial reliefs. More significant, perhaps, is that the Bill was passed without much of a debate, as it has happened on many occasions earlier. The Budget is much more than a financial statement of government income and expenditure. In recent years, it has become the most significant economic policy statement and deserves more intense scrutiny by Parliament. Besides, parliamentary debates on the Finance Bill can serve the salutary purpose of educating the public at large. It goes without saying that increased public awareness will lead to a more informed criticism of official policies, thereby enhancing their value.

The recurrent feature of getting the Finance Bill passed without meaningful debates over its provisions has led to a situation where the big picture is often lost sight of. The tax concessions offered this time involve many small changes in the way some taxes are to be calculated and exemptions given. By adding to the clutter, they work against the cherished medium-term goal of simplifying the tax regime, whose two important characteristics are uniform tax rates and very few exemptions. Also, the Indian tax policy has become extremely complicated because it seeks to achieve multiple objectives, including some that are quite unique. While all countries use their tax systems to accelerate investments, encourage savings, and promote exports, India is probably among the few that rely on their tax policies to further objectives such as industrialisation of backward areas, promotion of small-scale industries, and development of infrastructure. All these are without doubt important policy objectives but seeking to achieve them through incentives such as lower taxes and larger exemptions goes against the grain of tax reform. With two major tax reform measures — the direct tax code and the goods and services tax — scheduled for implementation next year, the least the government could have done was to articulate the need to address some of the likely obstacles to their implementation.