ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846
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Inequity in Retreat

THE fate of a number of the tax proposals made by Finance minister Yashwant Sinha in his 1998-99 budget throws interesting light on the interplay of economic interest groups and the preferences and priorities of the ruling coalition at the centre, particularly its dominent member. Of the Rs 263 crore of revenue the finance minister sacrificed while seeking parliament's approval of the Finance Bill, nearly Rs 200 crore was on account of restoration of excise exemption in respect of items such as branded ghee and spices, ski milled milk, butter, cheese, tea and 'namkeen'. The budget had proposed a levy of 8 per cent on these commodities "as a first step towards convergence of the mean rate". On second thoughts, the finance minister has felt it prudent to retract his proposal. The reason should be obvious to any observer of the budget- making process in India. Although the tax structure professes to be progressive with graduated rates of income tax and suitably differentiated rates of commodity taxes 10 moderate the burden op the poor, when it comes to any thing that pinches the makers of public opinion the articulate middle and upper income groups every finance minister who cares for his job fIinches. This is exactly what has happened this time too. Processed food products like branded ghee and cheese do not belong to the category of "inferior goods' in economics that figure in the consumption basket of the poor and so should not quite qualify for preferential treatment. Yet in the Indian milieu they apparently stand on the same fooling as 'essentials1 and so must continue to be exempt. So much for 'convergence of the mean rate' and similar sound tax principles, Not that our tax system always fails to pay heed to the progressive principle Items of mass consumption art generally kept out of the purview of commodity taxes or are taxed lightly while those that are used by the rich are taxed at relatively high rates. Then there are the direct taxes, personal income tax, corporation tax and wealth tax. Incidence studies on indirect taxes in the past have tended to show that they are perhaps mildly progressive if at all. But ail these studies suffer from acute methodological as well as data limitations. And the fact remains that the bulk of the revenue from union excises comes from inputs like iron and steel, (Petroleum products and chemicals, while a sizeable amount comes from textiles and tobacco products. For various reasons, despite its extended coverage, MODVAT does not yet serve to remove the cascading effect of input taxation completely, As it is, the operation of MODVAT suffers from many limitations. The95 percent restriction now imposed on the credit available under the scheme cannot but make things worse, Then there are the new imposts the service tax operating outside the MODVAT system, now extended to many items that go into business costs, for which there is no input tax credit. What the incidence profile looks like now is anybody's guess.

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