Tax and expenditure reform(The Indian Express)

Mains Paper 4: Economy
Prelims level: Tax expenditure policy
Mains level: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment

Context

•  The two most important economic considerations for a policy-maker are growth and inflation not Fiscal deficit.From a tax and subsidy perspective the market should set prices.
•  The government should achieve its equity objectives through direct benefit
  transfers.
•  The intent and direction of the interim budget are attempting, and beginning, to meet these objectives.

Evolving the tax expenditure policy

•  For the last 40 years, India has followed a misguided policy for alleviating poverty or for increasing food production.
•  We have followed the old-fashioned corrupt way food procurement, food distribution via the Food Corporation of India to ration shops from which 75 per cent of the population can access rice and wheat at Re 1 and Rs 2 per kg.
•  The amount of this corruption Rs 1 lakh crore.
•  By introducing Direct Benefit Transfer (DBT) first steps towards dismantling the 40-year-old corrupt policy of food procurement and distribution.
•  By raising (MSP) only the rich, upper-class farmers are really helped.
•  Indeed, the general concept of basic income was first articulated (and practiced and failed) in England in the late 18th century.
•  Incidentally, the failure was due to DBT being tied to the price of bread!
•  Approximately the same reason why the MSP system is (thankfully) failing.
•  The DBT, as presently announced, is a transfer of Rs 6,000 a year to poor farmers (those cultivating less than 5 acres).
•  The target is 120 million small farmers, and total expenditure, therefore, is Rs 72,000 crore a year.

Targeting group

•  In the paper, we recommend a transfer of Rs 520 per month for the rural poor and Rs 630 per month to the urban poor.
•  The second component of budget is the policy on tax rebates for those earning less than Rs 5 lakh a year.
•  The policy is strictly one of tax rebate, not an increase in exemption limit. If an individual earns Rs 5 lakh, she will have to file a return, state that she is earning Rs 5 lakh, and owe Rs 12,500 in taxes.
•  This is because there is a 5 per cent tax rate for those earning between Rs 2.5 and Rs 5 lakh.
•  This is then adjusted with the rebate of Rs 12,500 and so she owes zero tax.
•  Why couldn’t the government have just raised the tax exemption limit to Rs 5 lakh?
•  That is the brilliance of this policy you get into the tax net, as you should, so that when your incomes grow, you will contribute to the tax kitty.

Way forward

•  The calculations suggest that the government will lose about Rs 25,000 crore of revenue in 2019-20. There will be approximately 25 million taxpayers in the Rs 2.5-Rs 5 lakh bracket, and with an average income close to Rs 5 lakh, the government would have been owed about Rs 25,000 crore.
•  Total transfer by the government on account of DBT for the poor farmer and the lower middle-class worker is approximately Rs 1 lakh crore. Note that the spending on farmers is three times that of spending on the salaried worker.
•  Note also that this Rs 1 lakh crore is near identical to the present corruption loss of Rs 1 lakh crore due to the operation of the PDS.

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General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1) The Department of Official Language was set up in June 1975 as an independent Department of the:
A. Ministry of Social Justice and Empowerment
B. Ministry of Parliamentary Affairs
C. Ministry of Home Affairs
D. Ministry of Law and Justice

Answer: C

Mains Questions:
Q.1) Why couldn’t the government have just raised the tax exemption limit to Rs 5 lakh?