The Budget of the government of India uses many concepts. Over a period of time they have been clarified and definitions evolved to help in policy making.
Besides the ministry of finance and expert committees, the Division of Fiscal Analysis of the Department of Economic Analysis and Policy of the Reserve Bank of India has also contributed to the sharpening of such concepts as "fiscal deficit". In this process a certain amount of transparency has emerged making it possible for the terms to be understood in the same way by all.
It should be kept in mind that often different measures of the same characteristic are required to understand the implications of the trends. Thus, "fiscal deficit" brings out the over-all pressure on the public exchequer.
On the other hand, "revenue deficit" sounds the warning bell on the extent to which borrowing is resorted to for financing current consumption expenditure of government. However, despite the progress made in clarifying and refining the concepts, there are still certain grey areas. The use of standard definitions of concepts helps in enabling meaningful discussions.
One area which needs to be looked at is the concept of " tax avoidance". Under Indian law we have tax evasion and tax avoidance. While tax evasion is clear, viz., taxes due for payment but not paid through suppression of information or false information, the concept of tax avoidance is somewhat nebulous.
It includes both legitimate and illegitimate avoidance and calls for certain discretion on the part of the income tax department in allowing it leading to possible underhand dealings.
The question is one of bona fides of the transaction even if it is admissible in terms of the letter of the law. Such devices as the availing of deductions and rebates provided for savings, etc., under, say, Section 80 (L) and Section 88 are legitimate while the setting up of bogus trusts, the lending of money to a spouse, etc., cannot in spirit be claimed to be any different from tax evasion.
While some proposals have been made and laws tightened up in these areas there is still considerable leeway. In this connection, a look at the Canadian tax laws will be useful.
There are three types of behaviour identified under the Canadian law, viz., tax evasion, tax avoidance and tax planning. The first two are illegal and punishable. It is only the third, which, under Indian conditions will cover the concessions under, say, Section 80 (L), Section 88, etc., is legal. A law was enacted long ago in this country abolishing the recognition of benami transactions.
But the relevant rules for implementation have not yet been brought into effect with the result that the law is a dead letter. Hence urgent action needs to be taken to plug the loopholes in revenue collection.
There is also some confusion about the meaning of "Tax Base". Sometimes even official documents use it to mean something different from the correct technical sense. "Tax Base" should refer to the basis of taxation, viz., income, expenditure, capital gains and so on. It does not mean the proportion of the population covered as implied by even knowledgeable persons.
In the Budget Speech for last year (2001-2002) the finance minister made the following statements: "In Direct Taxes, my thrust during the last three years has been on providing stability of tax rates, widening the tax base, rationalising and simplifying the tax laws and giving impetus to economic growth.
These efforts have resulted in increasing the direct tax revenue from Rs 46,428 crore in 1998-99 to an estimated Rs 74,467 crore this year. In addition, the number of assessees has increased significantly from a little over one crore in March 1998 to 2.3 crore at the beginning of this year." It is obvious that he was referring to the number of people covered by taxes when he referred to "widening the tax base".
"Tax net" would have been a more appropriate term in this context. Incidentally, one hopes that the FM will give some indication of the additional tax collection through the widening of the tax net and the cost involved in the process. This will help the nation to know whether the one-by-six scheme has really been cost effective.
(The author is a former Officer-in-Charge of the RBI's Department of Economic Analysis and Policy)