Criminal breach of trust

An expanded and modified version of my column that appeared on Tuesday in MINT:

This column continues the analysis of the Indian budget for 2018-19 by examining issues that are either postponed or forgotten. First, the budget has ensured that India has arrived on the global scene. It was confirmed on the 2nd of February. During Asian trading hours, the Indian Sensex Index fell 2.3% or so. Later in U.S. trading hours, the Dow-Jones Industrial Average dropped 2.54%. So, Indian stocks have been the trendsetter for America! Immediately, the conclusion was that the re-introduction of the long-term capital gain tax was the culprit. There was no such excuse for America, however. Yet, it fell. Motivated arguments do not deserve our attention.

If income accruing to labour can be taxed, there is no reason why income accruing to capital should not be. If governments want to encourage long-term capital formation, then long-term capital investments can get some favourable tax treatment. Indeed, there is a case for treating all capital gains up to 36 months as short-term capital gain and taxed at the marginal rates of tax applicable to income. It can be done for foreign investors too. There can be then a 10% tax up to five years, 5% up to seven years and then zero. There is much room to improve and streamline the current methods of taxing capital gains in India. At present, for stock market gains, a rate of 15% for short-term capital gains is too low to induce investors to invest for the long-term and incur a tax rate of 10%. In fact, it might push some investors to become more short-term in their investment orientation. Much work remains to be done. Piecemeal approach, cumulated over time, renders the tax laws complex, unwieldy and hard to comply with, encouraging evasion and corruption.

Second, the Indian budget scores reasonably well on transparency. Having spent the last three days trying to understand the reasons for the revenue deficit ratio overshoot, I can vouch for it. The Open Budget Index for 2017 gives India a decent score of 48 with China scoring an abysmal 13 and Pakistan 44. But, Indonesia (64) and Philippines (67) in Asia score far better than India. I propose that all receipts or expenditure variations above a chosen percentage threshold (10% or 20%) and those above an absolute value of 3,000 crores should be explained in a separate document with cross-reference to the parent documents and pages, etc. More can and should be done. Some specific instances follow.

On the evening of 31st January, the government released the first revisions to economic growth estimate for 2016-17. Nominal GDP growth was revised down slightly to 10.8% from 11.0% estimated earlier. However, due to some upward revision to previous years’ estimates, the level of nominal GDP was estimated to be INR152.5 trillion while the earlier estimate was INR151.8 trillion. Earlier, on January 5, The Central Statistical Organisation (CSO) has estimated nominal GDP growth at 9.5%. On that basis, the GDP for 2017-18 should be estimated at INR167 trillion.  The government has assumed a figure of INR167.8 trillion. Perhaps, the government knows in advance the provisional GDP estimate for 2017-18 to be released later. Of course, this does not really move the needle on the deficit ratios except at the second decimal place. Yet, the government would have been better off sticking to the publicly available estimate of the CSO for 2017-18 GDP released less than a month ago.

The revenue deficit ratio overshoot of 0.7% in the revised estimate (2.6%) compared to the budget estimate (1.9%) means that one has to account for 1.18 trillion rupees of revenue shortfall and/or expenditure overshoot. Tax revenues are estimated lower by about 190 billion rupees. Most of it is due to the shortfall in indirect taxes which more than offsets the better corporate tax collection estimated. This is also despite the government ‘saving’ 63 billion rupees by not transferring cess collected for addressing calamities to the Disaster Relief Fund. More on the administration of cess later. Revised non-tax revenue receipt estimates are lower but the way in which the interest payments made by Railways (almost double the budget estimate) is shown is not transparent. Further, it was despite Railways spending less than the budgeted capital expenditure. It should not be shown on a net basis. Interest paid by Railways should be added to the overall interest payments. May not make for pleasant viewing but that is the right way to show it.

Vivek Kaul, writing for the Business Standard (‘India’s unpaid subsidies time-bomb just keeps ticking away’, 1st February 2018), has pointed out something that never came up in the post-budget analysis. Quoting from the Report of the Comptroller and Auditor-General of India, he pointed out that the Government of India owed more than 2.0 trillion rupees of subsidies to the Food Corporation of India. The interesting bit is that 60% was for the year 2016-17. The bonds that the government has issued to FCI in the past amount to Rupees 162 billion. No new bonds have been issued to them or cash paid to them in a while. Unpaid subsidies help show a lower deficit due to cash accounting while they remain threats to future deficits. The CAG estimates appear to be erroneous.

Upon cross-verification I found that the estimate of the cumulative unpaid subsidies at the end of 2016-17 could be placed at 538.8 billion rupees. When the NDA came to office, it was around 380 billion rupees. When UPA-2 was voted into office, it was only 46.7 billion rupees. Unpaid subsidies rose 52% CAGR between March 2009 and March 2014 – about 8.2 times! This is just a sample of the scorched earth that the NDA government inherited.

But, we will trust the CAG to report its findings right. While the subsidy arrears to FCI appears massively overstated, other findings of the CAG (Report No. 44 for the year 2016-17 published last December) are more damning. Of the 79 billion rupees that the Government of India collected during this period as R&D cess, only 6 billion had been utilised. Even more damning is the Education cess. In the ten years up to March 2017, 835 billion rupees has been collected as Secondary and Higher Education cess. Not a single rupee had been transferred to an earmarked Fund in the Public Account as no scheme was identified nor a designated fund opened in the Public Accounts of India.

This needs to sink in. The government raises the tax incidence on the public through such levies but does not bother to take the minimum steps to utilise them. It betrays the worst form of callousness to the taxpayer. In the end, all the cloak and mirrors that governments over time have engaged in and continue to do so can be traced to the total lack of accountability for outcomes. Over the years, if governments had provided essential services – safety, security, health and education – well, then the economy would have done better and the government would have benefited too in the form of higher tax take, obviating the need to engage in complicated obfuscation to its accounts.

In his ‘State of the Union’, the American President requested the U.S. Congress to empower Cabinet members with the authority to reward good workers and to remove Federal employees who undermined the public trust. Every member of the Indian Parliament must turn the gaze inward and ask whether the state of affairs as mentioned above is sustainable for the nation and whether they are leading it to doomsday. India is losing time and all of us are engaged in an elaborate charade of analysing numbers, wasting our time.

 

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5 thoughts on “Criminal breach of trust

  1. This cess issues has two angles. Cess is allowed to be credited directly to consolidated fund of India. States do not have share of cess. Therefore cess finds favours in budgets. In rest of the taxes there is share of states therefore actual tax incidence is higher than what is required for central government’s revenue collection target.

    Secondly, there was never a connection between the name of the cess and purpose to which proceeds should be deployed. That part was always an eyewash.

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    1. Let me take the States’s share matter first. I agree with you on that. That is why cess is preferred. On your first point, why would the CAG raise the issue if the cess funds are allowed to be credited to the Consolidated Fund of India? Moreover, the document titled, ‘Key to budget documents’ states that “The Consolidated Fund of India (CFI) draws its existence from Article 266 of the Constitution. All
      revenues received by the Government, loans raised by it, and also receipts from recoveries of loans granted by it, together form the Consolidated Fund of India.”

      “Moneys held by Government in trust are kept in the Public Account. Provident Funds, Small Savings
      collections, income of Government set apart for expenditure on specific objects such as road development, primary education, other Reserve/Special Funds etc., are examples of moneys kept in
      the Public Account.”

      Source: http://www.indiabudget.gov.in/ub2018-19/keybud/keybud2018.pdf

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      1. True. Let me share what I understand it could be wrong – please correct me if so.

        The Consolidated Fund of India is the main account. Government does not have direct access to this. If Government wants to spend then it needs to table an appropriations bill. Once parliament passes this bill the funds get credited to Public Account. Thereon, government is required to spend in accordance with the appropriations bill. The Budget itself is not an appropriations bill. That is tabled and passed later as and when required.

        Coming to cess, that too is never clear cut. Cess is enacted by central act of parliament. The act specifies if cess proceeds should pool into a fund (which they generally specify) or not. If not then the collection remains ambiguous and few years later an accounting entry reflects merging of the accounts. If there is a fund even then there has to be an appropriations bill to withdraw money from that CFI into that Fund. If you never raise this bill the back end remains all connected.

        National accounts are unlike corporate accounts so there is no continuity in accounting heads. What is noted is accounting liability under various heads – as you pointed out R&D head. But so long as there is money in CFI and there is an appropriations bill which is passed that money will be used. Thus if say Gram Sadak Yojana bill comes and only money left in CFI was supposed to be for R&D that wont stop GSY expenses. In corporate accounts they will reconcile the gaps (easier in corporate accounting than national accounts). So whenever they decide to allocate to R&D fund they will raise debt in future. So accounting level there is discrepancy – CAG highlights it.

        The next year government again has to start afresh (except the debt liabilities which continue), practically it turns into eyewash. Since money was collected and it was already used for something else.

        R

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      2. There is a clean way and there are other ways, I guess. The definition/description I shared does not leave much room for ambiguity as specific cesses must be identified, segregated and used through the Public Accounts of India.

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