The finance minister will rise to do so on the back of a largely satisfactory economic scenario. Gross Domestic Product (GDP) growth for financial year (FY) 2024 has been revised to a high of 8.2 per cent and comes after 7 per cent in FY 2023. The World Bank’s Global Economic Prospects has projected a steady growth of 6.7 per cent on an average for the next three fiscal years beginning 2024-25. GDP growth has been driven by the high growth in net taxes. 

Both direct and indirect have done well.Net direct tax collections touched Rs.19.58 lakh crore, a growth of 17.70 per cent year-on-year (Y-o-Y). Revenue from the Goods & Services tax (GST) for the same period touched Rs.20.18 lakh crore a 11.7 per cent growth compared to the previous year.

Gross Value Addition (GVA) grew by 7.1 per cent in 2023-24 over 6.7 per cent in 2022-23. The GVA growth has been possible because of multiple factors including growth in agriculture, mining, manufacturing, construction,and higher profits made by companies. 

These growth numbers were substantiated by the HSBC India Manufacturing and Services PMI indices of 57.5 and 60.2 respectively. Retail inflation has also eased to 4.75 per cent in May. But admittedly there is a lot more which needs to be done to spur and incentivize growth. Taxation obviously plays a critical role; ‘raising revenue is an essential enabler for a state to perform its functions’.

India’s tax to GDP ratio, the measure of the country’s tax revenue relative to the size of its economy, is low. In other words, the lower tax revenue means we have that much lesser to spend on improving infrastructure, health, education. India’s central tax to GDP ratio is about 11.6 per cent which is expected to hit 11.7 per cent in 2024-25. If we were to measure the tax to GDP revenue by including also State revenues, the tax to GDP ratio rises to about 17.5 per cent. This is still low when compared to the 34.1 per cent of OECD countries.

I shall avoid any specific budgetary recommendations which the finance minister is receiving in spades from all quarters and all hues of economists and journalists but restrict myself to some broad overarching observations which would apply equally to both direct and indirect taxes. Here I must confess I am quoting extensively from Prof.Karthik Muralidharan’s insightful recent book ’Accelerating India’s Development’.

Pay attention to quality of revenue in addition to its quantity. Muralidharan points out that we end up spending more in collecting money than what we collect - ‘each rupee raised by the government usually cost more than one rupee’.

He highlights the high marginal cost of public funds (MCPF) - the total social cost of raising an additional rupee of tax revenue. India’s higher MCPF reflects lower levels of formalisation, reliance on inefficient taxes, more human discretion and political constraints. He urges that we urgently need to improve our MCPF which would improve quality of revenue and boost quantity of revenue.

·       Tax public ‘bads’ to improve quality of revenue by which Muralidharan means that we should be cognizant that taxing an activity increases its price and reduces incentives to engage in it. He emphasises the need to tax public ‘bads’ that are detrimental to society. He suggests this would not only raise revenue but also increase social welfare.

·        Tax more inelastic factors of production-activities whose supply will not be impacted when taxed. The recommendation being to tax resources like land, real estate and natural resources but in a manner where value addition is incentivised.

·       Reduce the costs of tax enforcement and compliance and their unpredictability thereby reducing MCPF; a corollary to this would be to reduce the frequency of changes in policy or rates.

·       Try and ensure the fiscal compact between the taxpayer and the government is improved; taxpayers need to see the connection between taxes they pay and services they receive. This can be addressed by linking revenue streams to specific uses-taxes from pertroeum being used for improving transport, roads. This can improve compliance.

·       Greater collaboration between third-party research and government including greater investments in data analytics and forensics. This would be especially helpful in the case of GST where data to facilitate research by private entities is still not fully available. Such research will only strengthen the hands of government.

·       Muralidharan emphasizes the need for paying attention to revenue collection from urban areas - they are both the largest source of revenue and the largest source of leakages. He advocates increasing taxes on property, private transport in urban areas, and utilities which he believes are highly undertaxed.

·       To focus on ‘sin’ taxes-and undo the poor ‘moral’ policy of prohibition, where the costs of enforcement far exceed the benefits and does not stop evasion.

·       Bring in a uniform GST rate

GST is nearing its seventh anniversary. It was a truly transformational tax reform. The time has come to look at it closely for some course correction. While a uniform rate will not happen soon, reduction in the number of slabs from the current five is possible. This will reduce disputes of classification and interpretation. 

Getting the petroleum products into the GST-fold or at least in the first instance, natural gas which Minister Hardeep Puri has spoken about, and Aviation Turbine Fuel. Litigation in both taxes is a major area of concern. 

The long-awaited GST Tribunal is still to start functioning. On the Customs side the spurt in the number of free trade agreements (FTA) implies different types of import duty rates depending on the FTA partner apart from the MFN rate in case of imports from non-FTA countries. This makes compliance challenging - and opens the possibility of evasion. One way to address this is to reduce the normal import duty rates so that the arbitrage between FTA and non-FTA import reduces. 

The government needs to seriously look at the 15 per cent rate of duty of gold which has led to large scale smuggling as evidenced by the everyday reports of seizures.

Tax demand notice happy officers should be restrained. A notice once issued has a tortuous life of its own. (for instance, in direct taxes consequent to the amendment of Sec 148A of the Income Tax Act which empowered an officer to issue notices in case he has information that a taxpayer has undisclosed income for a specific year, there have been a spate of notices and old assessments reopened).

The tax base in both direct and indirect taxes need to be expanded. Far too few people and businesses are paying taxes. At last count in Income Tax it was about 0.68 per cent of the population from among the 6.6 per cent who file returns. Exemptions in both taxes need to be constantly pruned. Every exemption leads to loss of revenue and possibility of incorrect availment and evasion – and rarely serves the purpose for which it has been granted. 

India has some of the most geographically unequal regions. Despite one nation, one tax, the disparities between a Tamil Nadu and an Uttar Pradesh are stark. Ultimately any tax policy is as good as how it is administered. 

Reformist tax policy can in the hands of a field officer not in sync, could die a painful death while causing distress to the taxpayer.  Training is critical-and a constant upgrading of skills essential. Then and only then can the march towards becoming the third largest economy be a smooth walk.

(The author is the former chairman of the Central Board of Indirect Taxes and Customs. Views expresed are personal)