📰 The challenge of catching elusive taxpayers
Various reforms have been introduced over the years, but none of them has worked
•India’s tax collection is set to decline sharply this year because of the decline in national income and fall in employment due to COVID-19. Simultaneously, expenditures related to the pandemic are ballooning. Thus, the fiscal deficit in the budget is set to rise unless other expenditures are cut. However, there are committed expenditures which cannot be curtailed and the deficit in the budget is set to climb to a new high for 2020-21. So, there is no option but to try and collect more taxes.
•The Prime Minister unveiled income tax reforms to make the system faceless, painless and seamless. He stated that 15 million people pay income tax out of a population of more than 1.35 billion. This is the number for the financial year 2018-19. For 2019-20, the number of taxpayers may be similar given that the economy was slowing down and unemployment was at a record high. In 2020-21, the number would drop sharply due to the impact of COVID-19 and massive unemployment in the organised sector.
Drop in number of taxpayers
•The number of tax filers has increased but the number of taxpayers has dropped. This is a result of the tax concession offered in the Budget — those filing a return up to Rs. 5 lakh do not have to pay a tax. Interestingly, in 2012-13, a year for which the government had released detailed data in 2016, the number of effective tax payers was 16 million. So, in spite of an increase in population and the laws introduced in the last six years to bring the rich into the tax net, there has been little change in the number of taxpayers. The fact that the direct tax to GDP ratio in percentage terms is stagnating at about 5.5% is another indication of this.
•There are two categories of the well-off in the country: those who file a tax return and those who completely escape the tax net. If the former had declared more of their incomes, the tax to GDP ratio would have risen. If those who were outside the tax net had come into the tax net and started filing their returns, there would have been a rise both in the tax to GDP ratio and the number of taxpayers.
•A 2016 report says the top 10% of Indians earned 55% of the nation’s incomes. If these people could be brought under the income tax net and they paid their taxes honestly, at current tax rates, income tax to GDP ratio alone would have been about 18%. Add to that the collection from other direct taxes, like corporate tax, and the figure would be more than 20%. This figure of 55% does not take into account the black income generation in the country. Clearly a lot of taxes are not paid out of white incomes and none from the black incomes.
•Demonetisation was supposed to bring out the black incomes and turn them white so that the tax to GDP ratio could sharply rise. The government made repeated announcements about how many more people had come into the tax net after demonetisation and about how more tax would be collected. No such thing has happened as the Prime Minister’s statement implies.
•The government has been trying hard to tackle the large black economy. As soon as it started its innings in 2014, the NDA set up a special investigation team under court orders. It renegotiated the tax treaty with Mauritius to get back to India the money held abroad. But nothing seems to budge the rich (say, the top 1% in the income ladder) to pay more tax. Actually, the rich are fleeing the country. More than 23,000 high net worth individuals left the country in five years up to 2019. Embarrassingly, when the Defence Minister was in France last year to receive the first Rafale fighter jet, the CEO of Dassault Aviation said in a speech that India should not terrorise them with its tax and custom rules.
•A considerable part of the tax filing process was computerised when e-filing and, earlier, PAN were introduced. These measures tried to cajole people into filing honest returns. Former Finance Minister Yashwant Sinha introduced the scheme of honouring honest tax payers. The government is again talking of it. The Vivad se Vishwas scheme was introduced to settle tax disputes. But none of these schemes seem to have delivered.
A new system
•The government is able to trust neither the tax department officials nor the rich. So, it has decided to hand over the process of taxation to computers. The computer will decide who will assess the tax return of an individual. During the different stages of a case, different officers will be involved. That is why the new scheme is said to be faceless and anonymous so that no nexus can be formed between the taxpayer and the officer involved in passing the return, and money cannot be paid to evade taxes.
•The department is being reorganised into assessment units, verification units, review units and technical units. There will also be a small unit to take care of past matters. Apparently a pilot project was run last year to assess the efficacy of the new scheme of things. However, there is worry that the software can be manipulated by those who know the system.
•There is an administrative problem. The department is grossly understaffed and officers have inadequate time to scrutinise cases. A few thousand officers have to deal with lakhs of cases. What takes a clever Chartered Accountant a few months to prepare cannot be deciphered by an officer in a few hours. Incomes of salaried employees are simple to estimate but the problem lies with estimating business incomes. To estimate them one needs to know the revenue and costs. Both are fudged through under-invoicing and over-invoicing. Businessmen declare their entire household expenditure as business costs. Even if a lot of computerised data are available it may prove to be inadequate. In 2016, before demonetisation, the government had initiated an Income Declaration Scheme. To scare people, the department announced that it had data on 93 lakh high-value transactions and would use it to catch people but this had little impact.
•The highest tax rate has been brought down from 97.5% in 1971 to 30% (plus surcharge) now. After 1991, with new economic policies, the controls and regulations were sharply curtailed – the Monopolies and Restrictive Trade Practices Act, the Foreign Exchange Regulation Act, etc. were removed. But the well-off have constantly complained that tax rates are high and there are too many controls; that they pay all the taxes but get nothing in return. This lament is rather unfair since they have gained the most out of the country’s development. So, at what level would there be satisfaction that tax rates and regulations are fine?
•This is an important pointer to the feeling of social injustice in every section of the population. The well-off who have gained the most complain of it and the poor live with injustice. There is massive alienation in society. The pandemic also points to this – the way vast numbers have suffered and why they do not heed the authorities.
India cannot afford to be complacent in thinking that the pandemic alone will change the health-care landscape
•Two countries which lead in the COVID-19 cases tally in the world today, namely the United States (first) and India (third), are also the ones where the need for health-care reform post COVID-19 has been most keenly felt. This is due to the lack of effective universal health coverage (UHC) in these countries, which has broadened concerns beyond the frontiers of an epidemic response into the larger domain of access, equity, and quality in health care.
Legacy implications and UHC
•This lack of UHC has a long legacy in both these countries, which they owe to multiple long-standing factors and historical reasons that have put a damper on the UHC agenda. This long legacy has two important and inter-related implications when it comes to health-care reform. First, certain entrenched characteristics of these health systems that have accrued over decades tend to dictate the terms of further evolution and lead to a number of compromises. Second, the long legacy itself comprises a path-dependent trajectory that precludes far-reaching health-care reform.
•The US Affordable Care Act (ACA) can be an example of the first implication. It envisaged a number of overarching measures to expand health insurance and improve access, including Medicaid expansion, essential health benefits, and discouraging risk selection in insurance. However, the foundational aspects of U.S. health care, such as a fragmented private insurance landscape and a love for expensive specialised care, could hardly be altered due to their entrenched nature. The ACA reforms were thus superimposed on such largely non-negotiable elements, which in turn constrained the nature and scope of those reforms. It is little wonder that the ACA has been not very successful on multiple fronts, such as ensuring access commensurate with insurance levels, and checking the rise of premiums and out-of-pocket costs. A similar set of entrenched and non-negotiable fundamentals, including weak public and pervasive private health care, will also impact health-care reform in India.
India’s attempts
•The government has looked poised to employ Ayushman Bharat–Pradhan Mantri Jan Arogya Yojana (AB-PM-JAY) health insurance as the tool for achieving UHC, and such calls have only grown stronger in the context of the COVID-19 pandemic. Plans are reportedly under way to extend coverage to the non-poor population under AB-PM-JAY, which currently covers the bottom 40% of the population. Taking the health insurance route to UHC driven by private players, rather than strengthening the public provisioning of health care, is reflective of the non-negotiability of private health care in India. This could have several unwanted consequences, which merits attention.
•Stark maldistribution of health-care facilities (almost two-thirds of corporate hospitals concentrated in major cities) and low budgetary appropriations for insurance could mean that universal insurance does not translate to universal access to services, much akin to what was seen under the ACA in the U.S. Thus far, insurance-based incentives to drive private players into the rural countryside have been largely unsuccessful, and experience suggests that the public sector could be the only effective alternative. Further, the Indian story has traditionally been one of aiming high with little homework. Envisaging universal health insurance without enough regulatory robustness to handle everything from malpractices to monopolistic tendencies is a case in point. This could have major cost, equity, and quality implications. For example, shouldn’t there be a potent ‘Clinical Establishments Act’ before embarking on a universal scheme involving large-scale public-private collaboration?
•A similar argument can be made about the National Digital Health Mission (NDHM) conceived by the Centre. Integration and improved management of patient and health facility information are very welcome. However, in the absence of robust ground-level documentation practices and its prerequisites, it would do little more than helping some private players and adding to administrative complexity and costs like the electronic health records did under the US ACA.
•One possible advantage for India over the U.S. could be a relative ease of integrating fragmented schemes into a unified system. The AB-PM-JAY has this ability, but it would require mobilising sufficient and sustained political consensus.
•The second implication concerns path-dependent resistance to reform. The bigger and deeper the reform, the more the resistance. Covering the remaining population under the AB-PM-JAY presents massive fiscal and design challenges. Turning it into a contributory scheme based on premium collections would be a costly and daunting undertaking, given the huge informal sector and possible adverse selection problems. Meeting requirements through general revenue financing would greatly strain the exchequer and looks very unlikely especially in the immediate aftermath of the pandemic. In either case, an effective roll-out of UHC would require a robust regulatory and administrative architecture, entailing huge administrative expenses and technical capabilities. Harmonising benefits and entitlements among various beneficiary groups, and a formalisation and consolidation of practices in a likely situation of covering outpatient care, are formidable additional challenges. While these would need to be pursued incrementally, the question arises as to how to push such a thoroughgoing reform agenda, especially against a backdrop of decades of frail capacities and neglect of the health sector.
Upheaval yes, but also action
•While upheavals offer windows for pushing reform, as Johnson notes, “the weight of past and pre-existing paths strongly constrain and limit the impact of the most radical ruptures”. We cannot afford to be complacent and think that the pandemic will automatically change the Indian health-care landscape. This is particularly important since a protracted presence of the pandemic in the country could undermine its gravity and the perceived urgency for major reform. It will require mobilising concerted action from all quarters. Civil society would need to utilise this opening to generate widespread public consensus and pressure for health-care reform. The fact that States with higher per-capita public spending on health have fared better against COVID-19 can be invoked to back the reform argument. At the same time, politics would need to recognise the unprecedented populist significance of health and marshal enough will to negotiate organised opposition to change.
📰 India does need a Fiscal Council
Though it is not a silver bullet, it is an important institution needed to complement the rule-based fiscal policy
•The fiscal situation in India has been under severe stress even before COVID-19 and the novel coronavirus pandemic has only worsened it. The fiscal deficit of the Centre in 2019-20 as estimated by the Controller General of Accounts (CGA) was 4.6%, 0.8 percentage point higher than the revised estimate. For the current year, even without any additional fiscal stimulus, the deficit is estimated at about 7% of GDP as against 3.5% estimated in the Budget due to a sharp decline in revenues. The consolidated deficit of the Union and States could be as high as 12% of GDP and the overall debt could go up to 85%. When off Budget liabilities are considered, the situation looks even more alarming.
•While the prevailing exceptional circumstance warrants loosening of purse strings, it is necessary that the government must return to a credible fiscal consolidation path once the crisis gets over.
Need for transparency
•Besides large deficits and debt, there are questions of comprehensiveness, transparency and accountability in the Budgets. The practice of repeated postponement of targets, timely non-settlement of bill payments and off Budget financing to show lower deficits has been common. The report of the Comptroller and Auditor General (CAG) of India in 2018 on the compliance of the Fiscal Responsibility and Budget Management (FRBM) Act for 2016-17, highlights various obfuscations done to keep the liabilities hidden.
•These include special banking arrangements for covering arrears of fertilizer subsidy, issuing short-term bonds, unsecured loans and borrowing from the National Small Savings Fund (NSSF) by the Food Corporation of India towards meeting food subsidy and its arrears, financing irrigation projects from the Long Term Irrigation Fund (LTIF) created by the National Bank for Agriculture and Rural Development (NABARD), and financing of railway projects through borrowings from the Indian Railway Finance Corporation (IRFC) are just some examples. We are familiar also with the cases of the Life Insurance of Corporation of India buying out the Industrial Development Bank of India and the Power Finance Corporation buying out the Rural Electrification Corporation (REC) and remitting the money to the government as disinvestment proceeds.
•In order to make the Budgets comprehensive, transparent and accountable, the 13th Finance Commission recommended that a committee be appointed by the Ministry of Finance which should eventually transform itself into a Fiscal Council to “..., conduct an annual independent public review of FRBM compliance, including a review of the fiscal impact of policy decisions on the FRBM roadmap” (Paragraph 9.65). The FRBM Review Committee too made a similar recommendation underlining the need for an independent review by the Finance Ministry appointing the Council.
•The problem is that a Council created by the Finance Ministry and reporting to it can hardly be expected to be independent. Therefore, the 14th Finance Commission recommended the establishment of an independent Fiscal Council which should be appointed by and reporting to Parliament by inserting a new section in the FRBM Act. Former Deputy Governor of the Reserve Bank of India, Viral Acharya, in his recent book, Quest for Restoring Financial Stability in India , also makes out a case for a bipartisan, independent Fiscal Council.
The mandate
•A Fiscal Council is an independent fiscal institution (IFI) with a mandate to promote stable and sustainable public finances. Robert Hagemann (“How Can Fiscal Councils Strengthen Fiscal Performance?”. OECD Journal: Economic Studies, Vol. 1, 2011; p.76) defines a fiscal council as, “…a publicly funded entity staffed by non-elected professionals mandated to provide nonpartisan oversight of fiscal performance and/or advice and guidance — from either a positive or normative perspective — on key aspects of fiscal policy”. These institutions assist in calibrating sustainable fiscal policy by making an objective and scientific analysis.
•First, an unbiased report to Parliament helps to raise the level of debate and brings in greater transparency and accountability. Second, costing of various policies and programmes can help to promote transparency over the political cycle to discourage populist shifts in fiscal policy and improve accountability. Third, scientific estimates of the cost of programmes and assessment of forecasts could help in raising public awareness about their fiscal implications and make people understand the nature of budgetary constraint. Finally, the Council will work as a conscience keeper in monitoring rule-based policies, and in raising awareness and the level of debate within and outside Parliament.
Diverse role, more acceptance
•According to the International Monetary Fund (IMF), there were 36 countries with IFIs in 2014 and more have been established since. While most of the IFIs are in advanced countries, emerging economies too have also shown growing interest in them. Although their common agenda has been to function as watchdogs, there is considerable diversity in their structure and functions. The important tasks of these IFIs include: independent analysis, review and monitoring and evaluating of government’s fiscal policies and programmes; developing or reviewing macroeconomic and/or budgetary projections; costing of budget and policy proposals and programmes; and presenting policy makers with alternative policy options. Over the years, monitoring compliance with fiscal rules and costing policies and programmes have become major tasks of these councils.
•The OECD (2013) has documented the important principles needed for successful fiscal councils under nine broad heads and these are: local ownership; independence and non-partisanship; mandate; resources; relationship with legislature; access to information; transparency; communication and external evaluation. These principles are important, ensure autonomy, being unbiased, transparency, and effective and accountable Councils.
•How effective have these institutions been? A study by the IMF (“The Functions and Impact of Fiscal Councils”, July 2013), documents that the existence of IFIs is associated with stronger primary balances; countries with IFIs tend to have more accurate macroeconomic and budgetary forecasts; IFIs are likely to raise public awareness and raise the level of public debate on fiscal policy. Case studies in Belgium, Chile and the United Kingdom show that IFIs have significantly contributed to improved fiscal performances.
•In Belgium, the government is legally required to adopt the macroeconomic forecasts of the Federal Planning Bureau and this has significantly helped to reduce bias in these estimates. In Chile, the existence of two independent bodies on Trend GDP and Reference Copper Price has greatly helped to improve Budget forecasts. In the U.K., the Office for Budget Responsibility has been important in restoring fiscal sustainability. Cross-country evidence shows that fiscal councils exert a strong influence on fiscal performances, particularly when they have formal guarantees of independence.
The final word
•When the markets fail, governments have to intervene. What do we do when the governments fail? It is here that we need systems and institutions to ensure checks and balances. In that respect, a Fiscal Council is an important institution needed to complement the rule-based fiscal policy. Of course, it is not a ‘silver bullet’; if there is no political will, the institution would be less effective, and if there is political will, there is no need for such an institution.
•That is also true of the FRBM Act. While we cannot state that the FRBM Act has been an unqualified success, it has also not been an abject failure either. The counterfactual will show that things would have been much worse without it, and it has helped to raise the awareness of government, legislators and the public at large. Similarly, the Fiscal Council will help in improving comprehensiveness, transparency and accountability.
