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Tax complies, expenses do not

- Mitra scores on revenue mop-up but Bengal’s old habits die hard

Calcutta, Feb. 17: Amit Mitra has boned up on the art of budget-making in his third round, focusing more on the good news and tucking away the bad news.

Good news 1: Bengal’s income generation through own tax revenue is set to grow by about 64 per cent between 2011-12 (budget estimate) and 2014-15 (budget estimate).

Good news 2: The Bengal finance minister has not proposed any hike in taxes for the next financial year and is banking on compliance to meet his target.

Mitra should be complimented as lifting tax revenue from a little over Rs 27,000 crore to Rs 45,000-plus crore in a span of three budgets is no mean feat. His performance has taken tax to gross state domestic product ratio — an indicator of the extent to which growth in the economy is filling government coffers — above 5 per cent. As the rate was stuck around 4 per cent for several years, Bengal ranked at the bottom in terms of tax to GSDP ratio.

Bad news 1: The state’s indebtedness — an indicator of its inability to fend for itself — is expected to grow by around 35 per cent in the corresponding period.

Bad news 2: Mitra’s revenue deficit — an indicator of how the state’s income is lagging behind expenses — target for the current financial year has overshot by around 300 per cent.

Growth in indebtedness or the revised revenue deficit number overshooting budget estimates are not aberrations in case of Bengal, especially since Trinamul inherited a debt-ridden state from the Left.

But the fact that they continue to be unabated suggests the fundamental woes of the Bengal economy have not changed in the 32 months of governance under Mamata Banerjee.

Although the chief minister’s reaction to the state budget was not available till late in the evening, sources said she was happy with Mitra’s proposals as he stuck to her two important guidelines: no hike in taxes that can inconvenience common people and higher allocation for her pet projects.

The mainstay of Mitra’s economics of revenue buoyancy is higher compliance, a policy that he has underscored repeatedly since assuming office and introducing reforms in tax administration.

The budget documents reveal that he is aiming to increase the tax mop-up by Rs 6,000 crore in the next financial year through a combination of factors ranging from simplification of VAT registration to reforms in professional tax administration.

The revenue growth projection for 2014-15 is around 14 per cent, significantly lower than the 27 per cent growth he had achieved this year over last year.

Two factors helped Mitra this time — he had raised VAT rates by 1 per cent in the last budget and got the benefit of entry tax collection, which stood in excess of Rs 1,300 crore.

Mitra attributes the higher mop-up primarily to better tax compliance that was achieved through e-intervention and targeted anti-evasion drives for which various sleuthing units had been brought under one roof.

As the finance minister was not available to take questions after presenting the budget, the question of whether compliance alone could help revenue collection grow beyond a threshold remained unanswered.

Besides, the revenue impact of reforms in professional tax, which contributes very little to state coffers, will be limited, said state government officials.

“A tax to GSDP ratio of 5 per cent is low and the target should be around 9 to 10 per cent, which a state like Andhra Pradesh has achieved. While compliance can take revenue collection to a point, the next round of growth can come only from growth in the economy, which increases economic activity and consumption and fuels collections,” said a city-based economist who did not wish to be named.

According to the economist, the dip in revenue growth target to 14 per cent is an indication that even the government is realising that compliance alone cannot push up revenues to desired levels.

In his budget speech, Mitra was eloquent about how Bengal economy’s growth rate (for 2013-14) of 7.7 per cent exceeded the all-India figure of 4.9 per cent for the same period.

This brought back memories of the paradox that used to surprise economists in early 2000 as Bengal used to lag behind other states in tax to GSDP ratio despite registering high economic growth.

Those days, the refrain from the then government was that the tax mop-up did not reflect the reality as agriculture and micro, small and medium enterprises were outside the purview of tax collection.

“We need big industry for higher growth and higher tax revenues…. But that has not happened as yet,” said a senior state government official.

Although business was awaiting some announcement from Mitra who is also the industries minister, the budget documents were silent on any specific proposal.

But the finance minister took care to explain how the Left government had pushed the state into a debt trap. The fact that the total outstanding borrowing will be more than Rs 2.75 lakh crore was not mentioned in the budget, though he rolled out a number — Rs 69,065.81 crore — that the new government had to pay in three years “for the sins of the Left Front government”.

“Imagine, how many roads, bridges, schools, colleges, water works could have been built with this money,” Mitra said in his speech, with the members on the treasury benches shouting in chorus “shame, shame”.

Mitra did little to undo the “sins”, as his focus was more on departments that run the pet projects of the chief minister.

The strain that these pet projects are putting on the state exchequer was clear from the budget documents as the revised estimate of revenue deficit was three times more than what Mitra had estimated while presenting the budget last year.

“The only change in the state finances is the recent rise in revenue collection…. But the legacy of lack of heavy industries, little economic activities and high dependence on debt continue,” said a retired state official who had worked in the finance department.