nIrmala Sitharaman has proven to be a better finance minister than her rookie initial position would have led people to expect it. It started off on the mistaken foot, stuck as it were with the unrealistic numbers given by its predecessor in the 2019 budget, and manipulating the books that masked the true picture. As a first task, she did a clean-up: Expenses that were off the books were entered into the budget, and tax refunds now come in with speed and regularity that would have surprised many taxpayers. Budgeting has become a more sincere practice.
Sitharaman has also completed the process of de-allocating tax assessments by making them digital and transparent. Routine tax administration, which has lengthy been a source of harassment and corruption, is so far smoother than it was under its illustrious predecessors. Unfortunately, I’ve had partial (and therefore insufficient) success on the third big tax issue: ending the myriad of tax disputes through a settlement process.
The shift extends to the Goods and Services Tax (GST), which until now thought the initial promise made was to hoist the tax-to-GDP ratio more than provide a boost to the GDP itself. By enforcing electronic invoices, linking GST records to Aadhaar, and matching them with income tax files, it has largely addressed the problems of artificial invoices and tax evasion. That work is still a work in progress, though, because GST collections during their ascent following four lengthy years haven’t yet shown a steady jump. The task will be fully processed when the overdue task of rationalizing and reducing the number of applicable rates is carried out, along with a return to the initially promised impartial rate of return.
Fortune now smiles at the minister. The surge in tax collection during the April-June quarter, especially in corporate tax, reflects the rise in corporate profitability as big companies have used the pandemic to cut costs, including interest payments. That personal income tax collection, too, has improved during the second wave of the pandemic holds a lesson of its own, as it tests that the interim and government shutdowns in the final quarter have not had the alike destabilizing effect on economic activity nationwide. It closed the previous year.
The result of these trends is that the final government accounts for 2020-2021 showed better numbers than the revised estimates presented at budget time. This may be repeated with the revised figures at the end of the current fiscal year, compared to the preliminary budget estimates presented in February. These are positive initial trends when the overall financial situation remains under stress – in part because the Secretary has chosen not to exercise all of the tax options begin to her.
An incomplete but encouraging picture
While the Minister of Finance is the custodian of the government’s finances, her primary tasks are to guide key economic metrics: growth, domestic stability (i.e. prices) and external stability. The trend in GDP forecasts is that the recovery this year will be slower than initially expected, but rapid nonetheless. Question marks about following growth lie on the horizon. Regarding the external situation, India is in a comfortable zone due to big foreign exchange reserves and modest current account deficit.
Domestic economic stability is a point of concern, as double-digit wholesale and retail inflation are overhead the stipulated range for monetary policy. Both were driven by the global boom in commodity prices and supply bottlenecks. Some relief will soon come since global oil prices have fallen, but official optimism that the price situation will improve by the third quarter is tinged with wish-fulfilling hope.
This incomplete but encouraging picture of tax administration, revenue, and the state of the macroeconomic situation, in the midst of a pandemic, would not be conclude without mentioning significant policy downsides. The first is the persistent underperformance in privatization. The other thing is the failure to repair the banking mess. The third is the obvious trend toward protectionism, now supported by the proposed elimination of tariff exemptions. Finally, there is the abuse of the Enforcement Directorate and Income Tax Investigations to target government opponents and critics. Is depoliticizing the pursuit of weapons exaggerated?
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