LIKE MANY INDIAN, official traditions, the Union Budget too has its roots in the British Raj. On 18 February 1869 at 5:30 pm sharp, in order to coincide with noon in London, the British Finance Member of the India Council, James Wilson, presented the first Indian budget.
This set a precedent that is being followed in India to this day. The only cosmetic change the government plans to introduce this time is to advance the timing of the budget speech from 5:50 pm to eleven in the morning. Clearly, an exceedingly sensible step that ought to have been taken years ago.
However, more than the timing of the budget, what really needs to be changed is the very mindset that surrounds this annual exercise.
Shrouded in extreme secrecy since British times, the budget has traditionally been an occasion for dread. Who will the taxman axe this time is usually the question that has haunted generations of Indians.
Although the budget is more than just taxes and at one level reflects the fiscal mindset of the government and provides financial fuel to its policies, it is the issue of taxes that generally hogs the limelight and interests the common man.
The allocation of funds to various government departments for the average person is an academic ritual, both abstruse and of little practical consequence.
Financial allocations are more closely followed by business interests, departmental heads and NGOs who stand to benefit from them.
The sheer bulk of taxation and expenditure details that comprise the budget actually detracts from its larger purpose.
The focus of the budget ought to be its macro-economic impact, including issues such as the budget deficit, impact of overall investment, tax-GDP ratios and so on.
Instead, it is the small print of the budget that captures the public imagination and national attention, leaving the larger, and more important, issues to economists and financial experts.
The times, however, are changing and tax issues will hopefully be less in focus in future budgets. This mainly because the government’s powers to tax are being increasingly constrained in today’s environment.
Firstly, the specious instinct to constantly lower and raise taxes arbitrarily or according to the dictates of business lobbies or because of fiscal considerations is viewed poorly as such behaviour can severely damage business and consumer confidence.
The popular consensus the world over and in India is for a stable tax regime where sudden, arbitrary or punitive changes in tax rates are rare if not absent.
Sadly, the tendency of this government to impose taxes through dubious means such as surcharge, cess and various charges for public goods is a dark blot on the country’s fiscal scene.
The rates of direct taxes - income and corporate taxes - are a very political issue and have not generally been tampered with in any major fashion by governments in recent decades. These rates remain more or less stable and reasonable by world standards.
The government’s failure in the direct taxes area does not stem from rates but from its inability so far to expand the tax base and bring perennial tax dodgers into the taxation net.
One of the main areas affected by the budget is that of indirect taxes, chiefly excise duty (in the case of the Centre) and sales tax (in the case of the states).
Consumers and producers traditionally waited in dread to see how the budget would tax commodities. For decades, the government of independent India has carried on the horrible colonial practice of manipulating commodity and product prices through indirect taxes.
In the past, the colonial government manipulated taxes to favour the home country or milk revenues from a lucrative trade whereas today the manipulations are mainly due to lobbies.
Hopefully, the introduction of the general Goods and Services Tax (GST) will lower the tendency to continually and arbitrarily manipulate tax rates on various services and goods.
It is unlikely, however, that the GST regime will totally eliminate indirect tax manipulation as this is an instrument of influence in the hands of the political class.
The WTO (World Trade Organisation) agreement to which India is a signatory is the cause of another set of constraints. Unlike in the past, the government of India cannot tax imports as it pleases and in certain cases impose prohibitive rates of several hundred per cent (as was the case in wine imports).
India is committed to following the general agreement on rates and the government as a consequence will have less and less room to manipulate customs duties or impose punitive rates.
As customs duties decline and become ordered, the band available to vary them narrows. This should suggest to the government that the continual tampering with these rates is going to be counterproductive.
The other consequence of the WTO agreement on indirect taxation as a whole is the effect it is bound to have on the levels of taxation on domestic industry.
As customs duties have declined, continued high levels of excise duties have crippled the growth of several industries, electronics being among them. Due to this anomaly, it is cheaper to import entire systems than to import parts and make in India.
The greed for revenue has hitherto prevented the government from acting decisively in this area that requires urgent action. While financial bureaucrats continue to promise that they will “look into the matter”, very little changes on the ground and the make in India mirage keeps receding.
The budget thus needs to go beyond the taxation mindset and focus on larger issues through policies, incentives and the dismantling of bureaucratic roadblocks. If this happens the Indian budget would finally have bid adieu to its colonial past.