Rest the collector

Finance Minister P. Chidambaram’s report card on tax collections over the last seven months has earned applause from all around. A buoyant economy has filled the coffers at a pace greater than the GDP growth, pointing to efficiency on the part of the tax collector.

So much so, that on the personal income tax front, the 40 per cent rise in collections is attributable not only to the higher payouts by the existing tax payers, but also by those who have not done so in the past. The FM’s trouble spot, central excise collections (accounting for around 30 per cent of total revenues), which did not meet the targets last fiscal, is back on course. It has recovered, posting a 14 per cent growth. And this, when in March this year, taxes in the petroleum sector were pruned to combat the rising global crude oil prices. As a result, the sector that accounts for close to half the excise collections, posted a mere 1.5 per cent growth during the period under consideration, April-October 2007. In short, industry is not dodging taxes as much as it used to.

Surely, this behaviour ought to be rewarded by the FM. Tax sops? Certainly not. Rather, do away with taxes that are presumptive in nature —where the collector has significant discretion in deciding the quantum of tax incidence. Take the case of the Fringe Benefit Tax (FBT), introduced in 2005, which brings along a hefty dose of regulation and control. Companies need to maintain detailed accounts of the extent of employees claims on official resources like telephone or travel. The tax man has considerable discretion in deciding the levy. Worse, the efforts on both sides are disproportionate to the output.

FBT yields around 1 per cent of total tax collections. On the other hand, it only breeds corruption and loss of revenues to the exchequer. Furthermore, a case for easing regulation is bolstered by the fact that the recent surge in tax collections is on the back of corporate earnings.

The errant tax collectors’ ‘business’ thrives not just on regulation, but also its definition. While they can pat themselves for getting more people into the tax net, excise collection from private sector petroleum retailers in the country has certainly fallen well below the drop in their sales. The solution is not far to see—switch from the present regime of ad valorem taxation to specific duties, where the precise market rate of the product, say petrol or diesel, is not a matter of debate. This, since the excise duty is applied on the volume of the product alone, taking away the ‘valuation’ process from the tax collector.

Yes, ad valorem rates result in buoyancy in taxes—when domestic market rates linked to global rates go up, the tax collection improves and conversely so. On the other hand, fixed rates offer greater predictability.

However, in a rising market, where the exchequer benefits, will Chidambaram run the risk of foregoing revenues by switching to fixed rates? Maybe, the existing revenues leakage may justify a switch.