Where are the taxes coming from?

Till a few years ago, the Union government's Budget documents would clearly mention the total additional revenue the finance minister expected to mobilise or lose as a result of his proposed taxation changes.

Thus, it was possible to get a sense of the gross additional resource mobilisation that the finance minister's Budget had proposed. Not just the total figure, the break-up of how each of his key taxes would lose or bring in extra revenue for the Centre was also available.

Alas, that transparency is now gone. One has to depend only on the revenue mobilisation figures that the finance minister chooses to mention in his Budget speech. And more often than not, the finance ministers these days only mention the net gain or loss in revenue after listing out their direct tax and indirect tax proposals.

So, you are left at the mercy of well-informed revenue department officials, who may or may not divulge these figures depending on their mood. Of course, the Receipts Budget document will mention the total revenue the government hopes to mobilise under different taxes the next year. But these figures will also capture the impact of the natural buoyancy in tax collections in addition to the impact of the changes in tax rates. So, it is of no real help.

Quite apart from the fact that clearly spelt out figures on gross or net additional resource mobilisation efforts of a finance minister help in better evaluation of a Budget, there is another significant issue that gets overlooked in the process. This is about the levy of surcharges and cesses on taxes. It is important that people should have a clear idea of
what the additional impact of an increase or decrease in a cess or surcharge would be for the government. This cannot be left to a guessing exercise. Nor should this information be the preserve of a few officers in the finance ministry or the finance minister.

The issue is relevant because the Budget for 2007-08, for instance, has seen an increase in a cess, which may actually represent the government's single largest revenue mobilisation effort.

Back-of-the-envelope calculations show that a percentage point additional cess on all taxes would net an additional annual revenue of Rs 5,000 crore (Rs 50 billion) for the government.

There are other taxes like the coverage of IT companies located in software technology parks under the minimum alternative tax or the increase in the dividend distribution tax rate. But none of these proposals will have an impact as high as that of the cess.

There are, of course, some tax concessions the finance minister announced, as a result of which the net tax gain, according to his speech, was only Rs 3,000 crore (Rs 30 billion).

But the actual gross additional revenue mobilisation effort was much more - perhaps close to Rs 10,000 crore (Rs 100 billion). And a break-up of the revenue loss on account of the tax cuts and the revenue gain on account of a new cess or taxes would have helped in better understanding of the government's Budget exercise.

This becomes even more important because the Union government does not share with the states the revenues collected from surcharges and cesses. So, if the bulk of the additional revenue mobilisation happens through an increase in education cess, the Centre takes full credit for that revenue, while the states share the revenue losses on account of tax cuts.

This has serious implications because over the last few years, surcharges and cesses have begun accounting for a larger share in the Centre's gross revenue collections. Between 1991-92 and 1998-99, surcharges and cesses accounted for about 3-6 per cent of the total tax collections.

But the in the last five-six years, that share has gone up to 9-12 per cent. Also, collections  of surcharges and cesses are growing at a healthy rate year after year. For instance, surcharges and cesses will mobilise Rs 57,840 crore (Rs 578.4 billion) for the Centre in 2006-07 (up 21 per cent over the previous year) and in 2007-08 this amount will go up to Rs 64,530 crore (Rs 645.3 billion).

It is clear that the Centre gains as a result of higher revenue collections from surcharges and cesses. And the states (who collectively share among themselves 30.5 per cent of the total tax collections by the Centre, minus surcharges and cesses) are the obvious losers. It is time parliamentarians put pressure on the government to make it mandatory for the finance ministry to disclose tax-wise additional resource mobilisation efforts initiated in each Budget.

Equally important would be a disclosure on how much additional resource is mobilised by the Centre through changes in the rates of surcharges and cesses.