Oil or liquor, little else to tax even 30 years after reforms

Liberalisation fired on a few engines means the growth rocket is condemned to circle in low orbit. It never takes off

When the retail price of petrol and diesel plays a game of scoring centuries with the citizen’s purse, something seems to be giving way in the state of the economy. Amazing that this should be happening in July 2021, the month that marks the 30th anniversary of India’s pivot to liberalisation. How can a citizen believe the economy has benefited from the seminal events of July 1991, when the Centre’s third-largest source of revenue today comes from taxation of the petroleum sector. For states, the second-largest source of tax is the sale of liquor. If oil and alcohol pay for our upkeep, what did the fabled reforms team of the 90s achieve in diversifying the Indian economy?

These issues are even more germane when there is a massive demand to rebuild the economy. If not oil, which other sectors can provide the money to finance the infrastructure of railways, ports, renewable energy, hospitals, and schools? The only other option is to massively raise taxes on companies and block all routes of escaping capital gains. In the past two years, there have been reports of massive numbers of high net worth entities relocating from India to abroad. Possibly they have already sensed the temperature of the fiscal pool. What makes us think that a punitive level of tax on corporations will not make even more of them jump out from the pool?

Since 1991, the total number of income taxpayers has reached only 5.63 crore (FY19), or just 6 per cent of India’s adult population (it was about 3 per cent in the early 90s). But even now, less than half of the total direct tax receipts come from those with a declared annual income of above Rs 50 lakh. This category shall presumably pay the higher rates and possibly duck to avoid the levy.

This straitjacket of revenue makes one wonder what were the benefits of the tax reform since 1991. Even if one assumes that the Narendra Modi years were a washout, the tax reforms from earlier do not give much reason to cheer. It might seem dreadful that the direct tax to GDP ratio in FY21 is at 5.1 per cent, lower than even FY07, but even in the intervening decade and a half, it has tottered at 5.5 per cent. It will take more data to figure out if the corporation tax cut in September 2019 has deepened the problem, but anecdotally it does not seem so.

Instead, the accepted theology of reducing the indirect tax rates progressively over the years by each government, allied with a more drastic cut in customs duty, has deepened the stress on the fisc. Also, the thirty years of effort has not produced even one Indian company fit and agile to take on global competition. That they have now begun to pillory the government to give sops like those on e-commerce shows that the malaise is not recent, but a deep one.

The fiscal rejig over these decades were, therefore, excellent academic concepts but were disastrous practical policies. They could have been useful only if those making the tax rules could push concomitant reforms in labour, land and capital policies. A great example of how supporting policies crashed was the uproar against the Special Economic Zones. If some of those Zones had got going, India would not have been looking enviously at Vietnam and Bangladesh today.

In this context, where does one place the GST reforms? The tax receipts have begun to increase since the introduction of the e-way bills mechanism and greater oversight. But the fundamental weakness of not pushing factor reforms that the class of 1991 overlooked is hurting here too.

Without those reforms to help the industry grow, the harsh tax rejigs instead cut the support of domestic industry, made the states more dependent on liquor duties and reduced room for the Centre to finance support programmes for most sectors. That the Centre today is desperately raising oil taxes to fund hospitals now and schools thereafter speak eloquently of how narrow the vision of tax reforms was in the basket of liberalisation policies.

Possibly the worst impact of these tax changes were the cuts forced on the protection that used to be offered to the small and micro-enterprises. How badly the cuts without the concomitant reforms in power and labour laws hurt the 64 lakh enterprises in the sector was made brutally evident in the two rounds of Covid. Is it possible that the Rs 3 trillion of emergency support the Centre is handing out to them would have been lower had the support for these units continued?

Liberalisation fired on all cylinders is excellent, but fired on a few engines means the growth rocket is condemned to circle in low orbit. It never takes off. When castigating the state and central governments for keeping taxes on petroleum or liquor products high, some introspection since the summer of 1991 is necessary.

(The writer is a business journalist)

Disclaimer: The views expressed above are the author’s own. They do not necessarily reflect the views of DH.