QUESTION : India needs an independent fiscal council to assess budgets as well as for fiscal consolidation. Discuss
Topic – INDIA DOES NEED A FISCAL COUNCIL
- Fiscal Council
WHY IN NEWS ?
- The impact of the COVID-19 pandemic has yet again highlighted the need for creating an independent fiscal council.
The fiscal situation in India was under severe stress even before COVID-19 and the pandemic has worsened it. The fiscal deficit of the Centre in 2019-20 as estimated by Controller General of Accounts (CGA) was 4.6%. For the current year, even without any additional fiscal stimulus, the deficit is estimated at about 7% of GDP as against 3.5% estimated in the Budget.
FISCAL COUNCIL :
- According to International Monetary Fund (IMF) Fiscal councils are independent public institutions aimed at strengthening commitments to sustainable public finances through various functions, including public assessments of fiscal plans and performance, and the evaluation or provision of macroeconomic and budgetary forecasts.
- Fiscal Council is a permanent agency with a mandate to independently assess government’s fiscal plans.
The fiscal council’s mandate extends:
- To prepare fiscal sustainability analysis.
- Independent assessment of Central government’s fiscal performance and compliance with fiscal rules.
- To recommend suitable changes to fiscal strategy to ensure consistency of annual financial statement and steps to improve fiscal data.
- To produce an annual fiscal strategy report released at public domain.
- Independent analysis, review, monitoring and evaluating of government’s fiscal policies and programmes.
- Developing or reviewing macroeconomic and/or budgetary projections.
- Costing of budget and policy proposals and programmes; and presenting policy makers with alternative policy options.
- Monitoring compliance with fiscal rules and costing policies and programmes.
RECOMMENDATIONS FOR FISCAL COUNCIL :
- Article 293 (3):
- Article 293 (3) provides a constitutional check over borrowings and state government liabilities.
- But there are no such restrictions on the Centre.
- 14th Finance Commission:
- The FC recommended to establish an independent Fiscal Council through an amendment to the Fiscal Responsibility and Budget Management (FRBM) Act, 2003.
- This could be done by inserting a new Section mandating establishment of an independent Fiscal Council to undertake ex ante assessment (look at future events based on possible prediction) of budget proposals, to ensure their consistency with fiscal policy and Rules.
- The FC should include ex ante evaluation of the fiscal implications of the budget proposals i.e. evaluation of how real the forecasts are; their consistency with the fiscal rules and estimating the cost of various budgetary proposals.
- The ex post evaluation and monitoring of the budget should be taken by CAG.
- N.K. Singh committee, 2017:
- Fiscal Responsibility and Budget Management Review Committee in its 2017 report had proposed creation of an autonomous Fiscal Council with representatives from both states and Centre.
- D.K. Srivastava committee, 2018:
- The committee established by the National Statistical Commission (NSC) also suggested the establishment of a fiscal council that could co-ordinate with all levels of government.
NEED FOR AN INDEPENDENT FC :
- Historically, interim budgets in India have consistently overestimated revenue growth and underestimated expenditure growth.
- The deviations from budget estimates tend to be extraordinarily high for budget estimates presented in interim budgets.
- There are over-ambitious revenue targets in budgets combined with the lack of transparency in tax administration.
- Besides large deficits and debt, there are questions of comprehensiveness, transparency and accountability in the Budgets.
- Tax department had resorted to ‘irregular’ and ‘unwarranted’ methods to meet targets.
- Need for coordination between the finance commission as well as the GST Council.
- Need to inculcate financial discipline and cut the borrowings of Central government.
- So, there is a need to institute an independent and statutory watchdog to oversee the state of public finances.
- As a watchdog, FC can prevent the government from creative accounting or clever financial engineering.
ARGUMENTS SUPPORTING FC :
- An unbiased report to Parliament helps to raise the level of debate and brings in greater transparency and accountability.
- Costing of various policies and programmes can help to promote transparency over the political cycle to discourage shifts in fiscal policy.
- Scientific estimates of the cost of programmes and assessment of forecasts could help in raising public awareness about their fiscal implications and make people understand the nature of budgetary constraint.
- The Council will work as a conscience keeper in monitoring rule-based policies, and in raising awareness and the level of debate within and outside Parliament.
ARGUMENTS AGAINST FC :
- Diluting credibility of the Finance Ministry and other institutions.
o The fiscal council will give macroeconomic forecasts which the Finance Ministry is expected to use for the budget.
o Currently, both the Central Statistics Office (CSO) and the Reserve Bank of India (RBI) give forecasts of growth and other macroeconomic variables, along with a host of public, private, and international agencies.
o Forcing the Finance Ministry to use someone else’s estimates will dilute its accountability. If the estimates go awry, it will simply shift the blame to the fiscal council.
- Duplication of auditing work
o There is already an institutional mechanism in the form of the Comptroller and Auditor General (CAG) audit to prevent the government from gaming the fiscal rules through creative accounting.
o If the CAG mechanism has lost its teeth, then there is a need to fix that rather than creating another costly bureaucratic structure.
- When the markets fail, governments have to intervene. What do we do when the governments fail? In that case we need systems and institutions to ensure checks and balances.
- The institutional mechanism like Fiscal Council will enforce fiscal rules and keep a check on Centre’s fiscal consolidation and check over borrowings of the centre.
WAY FORWARD :
- Apart from advisory functions, it will forecast key macro variables like real and nominal GDP growth, tax buoyancy, and commodity prices.
- Similarly, it will do a monitoring role about the use of escape clause and also specify a path of return.
- Monetary policy has received wider public attention, after the setting up of the Monetary Policy Committee.
- A fiscal council could do the same for fiscal policy, with regular meetings that produce assessments.
- Further, the working of a fiscal council would help harmonizing fiscal policy with monetary policy.
QUESTION : Universal Health Coverage: A Milestone to be achieved for India.( IMPORTANT FOR AN ESSAY )
Topic- REVERSING HEALTH SECTOR NEGLECT WITH A REFORM AGENDA
- Indian Health Sector
WHY IN NEWS ?
- The pandemic has highlighted the need for effective universal health coverage (UHC)
STEPS BY GoI TO ACHIEVE UNIVERSAL HEALTH COVERAGE :
- The government is poised to employ Ayushman Bharat–Pradhan Mantri Jan Arogya Yojana (AB-PM-JAY) health insurance as the tool for achieving UHC.
- Plans are reportedly under way to extend coverage to the non-poor population under AB-PM-JAY, which currently covers the bottom 40% of the population.
CHALLENGES OR CRITICISMS OF GOVERNMENT’S APPROACH :
- Private Sector Prioritised: Taking the health insurance route to UHC driven by private players, rather than strengthening the public provisioning of health care, is reflective of the non-negotiability of private health care in India.
- Urban Bias in Private Health Services: There is stark maldistribution of private health-care facilities -almost two-thirds of corporate hospitals concentrated in major cities .
- Coverage doesn’t ensure access: Low budgetary
appropriations for insurance could mean that universal insurance does not translate to universal access to services, much akin to what was seen under the Affordable Care Act in the U.S.
- Experience points to different direction: Insurance-based incentives to drive private players into the rural countryside have been largely unsuccessful, and experience suggests that the public sector could be the only effective alternative.
- Little homework before expansion: Envisaging universal health insurance without enough regulatory robustness to handle everything from malpractices to monopolistic tendencies, will only lead to distorted results.
- Need for Legislations: Government should enact ‘Clinical Establishments Act’ for effective monitoring & compliance, before embarking on a universal scheme involving large-scale public-private collaboration
- Path-dependent resistance to reform: The bigger and deeper the reform, the more the resistance. Covering the remaining population under the AB-PM-JAY presents massive fiscal and design challenges.
- Fiscal Challenges: Meeting requirements of Universalisation through general revenue financing would greatly strain the exchequer and looks very unlikely especially in the immediate aftermath of the pandemic.
- Administrative Challenges: Turning AB-PM-JAY into a contributory scheme based on premium collections would be a costly and daunting undertaking, given the huge informal sector and possible adverse selection problems.
- Technical Challenges: Harmonising benefits and entitlements among various beneficiary groups, and a formalisation and consolidation of practices in a likely situation of covering outpatient care, are formidable additional challenges.
- Challenges with National Digital Health Mission (NDHM) that complements the UHC Scheme.
o Integration and improved management of patient and health facility information are very welcome.
LOCAL COMMUNITY LEVEL HEALTHCARE INTERVENTION TO ACHIEVE ‘HEALTH FOR ALL’ :
- Local community-level intervention is the first source of comprehensive and accessible healthcare that meets the immediate needs of individuals. Addressing issues at this level can result in risk screening for early disease detection bringing down the overall disease burden of the country.
- Provision of preventive services at the local level like vaccinations and family planning, nutrition and maternal care can reduce the need for secondary and tertiary healthcare services.
- Management of chronic health conditions and palliative care at the local level can reduce the out-of-pocket expenditure for people.
- Maintaining the physician-patient ratio at the grassroots level can ensure the availability of doctors for all, reducing the dependence on quacks and eliminating preventable causes like incorrect treatment.
- The healthcare intervention at local community level should be supplemented by upgradation of infrastructure, technological advancement and capacity building of health workers.
- Decentralised policy making that involves local community health workers can effectively address the local healthcare needs.
- Hence, it is important to address these issues at the community level to achieve ‘Health for All’.
WAY FORWARD :
- While upheavals offer windows for pushing reform, a protracted presence of the pandemic in the country could undermine its gravity and the perceived urgency for major reform.
- Civil society would need to utilise this opening to generate widespread public consensus and pressure for health-care reform.
- At the same time, politics would need to recognise the unprecedented populist significance of health and marshal enough will to negotiate organised opposition to change.
QUESTION : Critically evaluate the status of tax administration in India and what measures would you suggest to make tax administration citizen friendly?
Topic- THE CHALLENGE OF CATCHING ELUSIVE TAXPAYERS
- Assessment of Various Tax Reforms
WHY IN NEWS ?
- India’s tax collection is set to decline sharply this year because of the decline in national income and fall in employment due to COVID-19.
- 15 million people paid income tax out of a population of more than 1.35 billion for the financial year 2018-19. In 2012-13, the number of effective tax payers was 16 million.
- In 2020-21, the number would drop sharply due to the impact of COVID-19 and massive unemployment in the organised sector.
- The number of tax filers has increased but the number of taxpayers has dropped due to the tax concession offered in the Budget — those filing a return up to ₹5 lakh do not have to pay a tax. .
- The direct tax to GDP ratio is stagnating at about 5.5%.
So, in spite of an increase in population and various tax reforms there has been little change in the number of taxpayers.
Tax-to-GDP ratio .
- It is a representation of the size of the government’s tax revenue expressed as a percentage of the GDP.
- Higher the tax to GDP ratio the better financial position the country will be in.
- The ratio represents that the government is able to finance its expenditure.
- A higher tax to GDP ratio means that the government is able to cast its fiscal net wide. It reduces a government’s dependence on borrowings.
- A higher tax to GDP ratio means that an economy’s tax buoyancy is strong as the share of tax revenue rises in sync with the rise in the country’s GDP.
STEPS OF GOVT. INCREASING DIRECT TAX COLLECTION AND INVESTMENT :
- Personal Income Tax – The Finance Act, 2020 has provided an option to individuals and co-operatives for paying income-tax at concessional rates if they do not avail specified exemption and incentive.
- Abolition of Dividend Distribution Tax (DDT) – The Finance Act, 2020 removed the Dividend Distribution Tax in order to increase the attractiveness of the Indian Equity Market.
- Vivad se Vishwas – Under Vivad se Vishwas, declarations for settling pending tax disputes are currently being filed.
- Encouraging digital transactions – In order to facilitate the digitalisation of the economy and reduce unaccounted transactions, various measures have been taken which include:
- Reduction in rate of presumptive profit on digital turnover,
- Removal of Merchant Discount Rate (MDR) charges on prescribed modes of transactions,
- Reducing the threshold for cash transactions,
- Prohibition of certain cash transactions, etc.
- Raising of monetary limit for filing of appeal – To effectively reduce taxpayer grievances and help the Income Tax Department focus on litigation involving complex legal issues and high tax effect, the monetary thresholds for filing of departmental appeals have been raised.
- Expansion of scope of TDS/TCS – For widening the tax base, several new transactions were brought into the ambit of Tax Deduction at Source (TDS) and Tax Collection at Source (TCS).
ABOUT TRANSPARENT TAXATION – HONOURING THE HONEST’ SCHEME :
- It is aimed at easing compliance and expediting refunds, benefiting honest taxpayers.
- The computer will decide who will assess the tax return of an individual –
o During the different stages of a case, different officers will be involved.
o It will be faceless and anonymous so that no nexus can be formed between the taxpayer and the officer involved.
o The software can be manipulated by those who know the system.
o Administrative problem: The department is understaffed and officers have inadequate time to scrutinise cases.
o Problem with estimating business incomes: To estimate them one needs to know the revenue and costs. Both are fudged through under-invoicing and over-invoicing.
IMPORTANT TERMS :
Corporate Tax: It is levied on a firm’s profit by the government.
o It is taxed on operating earnings after expenses have been deducted.
o The rate of corporate tax in India varies from one type of company to another i.e. domestic corporations and foreign corporations pay tax at different rates .
Dividend Distribution Tax :
(DDT): Dividend refers to the distribution of profits to shareholders of a company.
o Thus, the dividend distribution tax is a type of tax that is payable on the dividends offered to its shareholders by the corporate.
o Higher dividends mean a greater tax burden for the corporate entity.
MERCHANT DISCOUNT RATE :
MDR is the cost paid by a merchant to a bank for accepting payment from their customers via digital means. The merchant discount rate is expressed in percentage of the transaction amount.
Minimum Alternate Tax :
o At times it may happen that a taxpayer, being a company, may have generated income during the year, but by taking the advantage of various provisions of Income-tax Law (like exemptions, deductions, depreciation, etc.), it may have reduced its tax liability or may not have paid any tax at all.
o Due to an increase in the number of zero tax paying companies, Minimum Alternate Tax (MAT) was introduced by the Finance Act, 1987 with effect from assessment year 1988-89. Later on, it was withdrawn by the Finance Act, 1990 and then reintroduced by Finance Act, 1996.
o MAT is an important tool with which tax avoidance can be prevented.
- The most important measure for improving tax to GDP ratio is ensuring the citizens pay their taxes. The introduction of Direct Tax Code can help in greater compliance in this regard.
WAY FORWARD :
- Increasing the Digital Infrastructure
- Ensuring Data Privacy- by increasing more government contribution in GSTN and reducing the influence of private players on it.
- Federalism – both center and state needs to work together or it would create workspace challenge.
- Need to Celebrate good financial behavior.
- Tax simplification and Stability
- Capacity building of lesser endowed stakeholders.
- Ensuring Openness, Transparency and Accountability in Taxation in India.
- Giving Incentives and Rewards – for firms complying by the set norms and standards.
- There should be an Tax Ombudsman to bring transparency by reducing tax evasion in India.