3.24 In 1995-96, the gross tax revenues of the Centre amounted to 10.24 per cent of GDP. The corresponding figure is 10.70 per cent as per the 1996-97 Budget. With appropriate policy measures and administrative efforts, it should be possible to raise this ratio to 11.50 per cent. In 1995-96, the own tax revenues of the States amounted to 5.72 per cent of GDP of which sales taxes alone) brought 3.25 percentage points. Given the potential of the sales tax and the scope for rationalisation arid better enforcement of other State taxes too, it should be possible to rise the ratio of state tax revenues to around 6.5 per cent of GDP Tax revenues should be raised primarily through rationalisation and broadening of the bases of the existing major taxes.

3.25 Tax laws would need to be simplified and exemptions brought down to bare essentials. Such measures would be applicable to both the central Government as well as the State Governments. In addition there is need for greater inter-State coordination, especially in sales tax matters and between the States and the Central Government on the issue o;f moving towards a system of VAT.

3.26 The yield of income taxes can be increased substantially by broadening the base and strengthening the administration while at the same time ensuring that the main aim of administration would be to collect increasing revenues without harassment and that the exacting of illegal payments is drastically cut down. The most important step in this direction is to make it mandatory by law that a permanent account number (PAN) must be acquired by several categories of persons, and that it should be compulsorily used for a number of transactions. A central computer unit should be set up which will cover all ranges in India and will contain all the PAN numbers and detailed information

from every account. It must be pointed out that, at present no master file of tax payers or of PAN holders exists in a central place. The creation of this master file is of the highest priority.

3.27 The large and growing black or parallel economy in India has been a drag on the development process and on the ability of the government to meet the pressing needs of the poor and vulnerable sections of the people. There is need to tap these forms of income and wealth in order to provide the necessary resources for growth and development. The presumptive element in the existing tax system should be strengthened by introducing expenditurebased presumptive income tax on the basis of reliable reference lists of proxies, such as telephones, cars and other vehicles, gas and electricity connections. A close look also needs to be taken at real estate, which forms an important component of black assets. The tax base can be expanded further by strengthening the system of tax deduction at source (TDS) and requiring tax to be deducted at source in respect of all dividends, income from units of mutual funds and interest on debentures and deposits. All TDS circles must be computerised so that all large tax deductors will be able to file their TDS returns electronically.

3.28 Non-payment of corporation tax by a number of companies is a serious issue. In order to broaden the base of this tax, the government has recently introduced the Minimum Alternate Tax (MAT). Methods of taxing corporate profits to yield more revenues need to be considered, consistent with the need to promote investment and growth in the economy.

3.29 As regards excise duties, considerable progress has been achieved in rationalising the duty structure and in moving towards a system of VAT at the manufacturing stage There is agreement in principle that the base must be broadened the rates must be moderate. But high rates on particular commodities cannot be brought down unless the burden is more widely shared through the removal of a plethora of exemptions. It is to be remembered that the existence of exempted goods also opens up loopholes for misuse of MODVAT credit. The existing system of different rate bands needs to be continued since it is too early to give up relatively higher taxation of luxury goods both for resource generation and equity considerations.

3.30 The service sector has registered impressive growth during the recent years and is expected to continue to grow during the Ninth Plan period, but its contribution to budgetary resources is not commensurate with its share in GDP. The MODVAT presently under operation in the excisable sector of the Centre should be extended mutatis mutandis to service sectors as well. Alternatively, the Centre could

delegate the powers to levy, collect and retain the yield of such taxes to the States.

3.31 Computerisation has hardly made headway in the computerisation as under a VAT regime be introduced. Along with this, the procedures and documentation can be simplified.

3.32 Among the State taxes, the sales tax is by far the most productive tax. It is generally agreed that with the rationalisation of the tax structure and improvement in the administration, it is possible to increase the yield of the sales tax substantially. A Committee of State Finance Ministers on Sales Tax Reform had recommended that the base should be broadened by reducing the number of exemptions to a few, by having only three rates apart from zero, by putting an end to the policy of competition among the States in offering sales tax concessions and by gradually moving over to a system of value added tax in each State. Even without adopting the value added tax, by adopting the other recommendations of the Committee, it is possible to raise the sales tax yield significantly if tax administration could be improved by computerisation and related activities through central support.

3.33 The rationalisation, inter-state coordination and better enforcement of the other State taxes, particularly the stamp duty and the motor vehicles tax, would also generate a considerable increase in revenues. In this context it needs to be noted that the required constitutional amendment to enable the Parliament to enact the necessary legislation for levy of consignment tax to prevent evasion of sales tax was carried out in 1982-83. There are differences of opinion among States as regards its implementation. A consensus needs to be developed before implementation of this tax measure.

3.34 Sufficient attention has not been paid to realisation of non-tax revenues. Areas from where non-tax revenues can be augmented are irrigation charges, royalties on minerals and revision of user charges on services rendered by the government. There is an urgent need for more frequent revision of water rates and effective water rate administration. The approach should be collect at least enough revenues to meet the full O&M expenditures of the irrigation department. There is also urgent need to raise the efficiency of irrigation systems by reducing costs and supplying water in time and in adequate measure. The Ninth Plan will encourage transfer of irrigation management to users' associations/organisations in order to improve operational performance and user-charge recovery. Privatisation/Cooperation in all possible areas of irrigation development may also be considered. As far as revision of royalty on minerals are concerned, they should

be revised at least once every two years.

3.35 With the increased role that is being proposed for, the Panchayati Raj Institutions (PRI) in the Ninth Plan, the issue of resources for these bodies assumes of paramount importance. Along with the devolution that may be made by the State Finance Commissions, some taxation powers may also need to be devolved. In addition, PRIs should be given Powers to raise revenues from common properties, such as land and sub-soil water.

3.36 The local bodies and other autonomous agencies have the potential to tap substantial resources through fiscal arid financial, measures and to eventually become selfreliant. All encouragement needs to be provided in this direction through enabling measures by the central and state governments.

3.37 In view of the spirit of cooperative federalism it is necessary that the share of the flow of central assistance for State Plans should be substantially higher. In order to achieve this, it would be necessary that a large number of' centrally sponsored schemes which are within the purview of subjects assigned to the states should be abolished and the surplus funds should be channelised to Central Assistance for State Plans. The Central Government should cut down the size of Ministries and Departments dealing with Subjects which are mainly the responsibilities of the States.

3.38 Along with efforts to raise additional revenues, there is a need to curtail public expenditures in such a manner as to subserve the objectives of efficiency and growth on the one hand, and equity and social justice on the other. The Ninth Plan will work towards evolving an integrated income, wages, price and expenditure policy. Some of the elements of such a policy are addressed.

3.39 There is agreement that there is surplus staff in general administration and also in the administration of functional departments. There is also overstaffing in the public works department. This surplus staff must be identified and shed. At the same time, employment in primary schools, health centres and road building will increase. The share of expenditure on priority sectors cannot be increased unless the share of administrative expenditure is brought down.

3.40 The share of interest payments must be brought down by limiting the fiscal deficit as suggested in the present exercise and by retiring some of the existing public debt, Given the size of the debt, retirement would achieve only a relatively small reduction in the debt burden. In particular, the need to contain the inflationary pressures, preferably to around 5 per cent per annum, places

restrictions on the use of money finance of the fiscal deficit to reduce the debt burden. However, through the sale of seized contraband gold and some of government lands and through disinvestment of PSU shares, substantial funds could be raised and used for the retirement of debt. The State Governments could sell off many of their enterprises and use the proceeds for the retirement of debt.

3.41 Subsidies have become an important and growing component of public expenditures. At present, open subsidies absorb nearly 20 per cent of the tax revenues of the government, both Centre and States taken together. In addition, there are a number of hidden subsidies whose magnitude and quantum are rarely measured or monitored. While it would not be desirable to have fiscal neutrality between the poor and disadvantaged on one hand and the rest of the country on the other, subsidies should be deliberate instruments of government policy and should not arise through oversight and default. It is therefore of utmost importance that subsidies be transparent and closely targetted. Considerable saving-, may be effected by this measure alone.

3.42 Similarly, cross-subsidisation between different groups of people depending upon their needs and ability to pay is a well-accepted form of transfer and forms an important component of public policy. In this case too care needs to be taken to ensure transparency and targetting in order to prevent undue and unjustifiable burden on the transferors, which may have negative effects on the over-all economic system.

3.43 Fixation of administered prices and control of prices charged by public sector enterprises on extraeconomic considerations are important forms of non-transparent subsidies. It is of utmost importance that such prices be fixed on the basis of economic considerations and the subsidy element be pre-specified in order to prevent it from increasing by default.

3.44 All efforts need to be made to make the public sector enterprises strong and competitive. The issue of proper pi-icing has already been discussed, but there are other dimensions. In particular, it is necessary to professionalise the management of these companies, and to introduce greater involvement of workers in their management. Government interference in the operation of these enterprises must be removed, and all autonomy, along with the necessary accountability, must be granted to the Board and the management.

3.45 Finally, public resources will need to leveraged in order to derive the maximum impact from their deployment. In order to do so effectively, innovative methods of public-private partnerships will be evolved and implemented during

the Ninth Plan.

Infrastructure

3.46 As has been pointed out, there has been considerable slippage in the growth of capacity in the infrastructure sectors during the Eighth Plan period. In view of this, even in the base-line scenario of 6.2 per cent growth there is a need to improve the efficiency and capacity utilisation of the existing infrastructural assets. In the accelerated growth scenario such steps would need to be taken with even greater vigour.

3.47 The first priority for augmenting the availability of infrastructural facilities will lie in accelerated completion of ongoing projects so that they start yielding returns as early as possible. This in itself, however, will not be enough and efforts would have to be made to initiate new infrastructure investments. In view of the resource constraint, the Government will be able to provide only a part of the total requirements. This is even more pressing in view of the fact that a large number of infrastructure projects will be of a long gestation type, particularly in the road and irrigation sectors, which would have to be mainly in the public domain. Substantial private involvement in infrastructure will have to be encouraged not only in order to provide the requisite capacity during the Ninth Plan, but also to create the pipeline investment that would be necessary for maintaining and accelerating the growth rate of the economy in the post-Plan period.

3.48 In order to achieve the desired levels of investment, both public and private, in the infrastructure sectors, it is of great importance that the issues of appropriate pricing and cost recovery are tackled at the earliest. Appropriate pricing policy, on the one hand, will enhance the resource availability with the public authorities so that not only is the necessary finance available for undertaking adequate maintenance and upgradation of existing facilities, but also for providing investible resources for making fresh investment. On the other hand, the revision of prices is a necessary instrument for making infrastructural projects viable and attractive for the private sector. At the same time steps would have to be taken to reduce transmission losses, including theft of power, which in themselves are important reasons for raising the average cost of energy. Reduction of such avoidable losses will be critical for reducing the burden of the consumers and ensuring viability of investments.

3.49 There will, however, be other infrastructure sectors where the gestation periods would be long and immediate pay back cannot be expected. In such sectors, either the Government would have to do the bulk of the investment, or would have to evolve appropriate methods of

public-private partnership so as to make such projects attractive for the private sector.

3.50 These and other issues relating to infrastructure sector, including Transport Energy and Communications are dealt with, in greater detail in Chapter-IV on "Sectoral Strategies".

Improving Efficiency

3.51 The resource constraints being faced by the government at all levels and the public sector requires that the existing assets be used more productively and efficiently. This would not only generate additional resources for development, but would also reduce the ICOR significantly so that a higher rate of growth can be achieved with the same level of investment. The primary cause of low capacity utilisation of existing public assets is that maintenance needs have not been met to the extent required for keeping these assets in good condition. This has largely been the outcome of the financial stringency that has been faced by the public authorities. This has led to a situation where, on the one hand, fresh capacities are being added to social and economic infrastructure, while on the other existing capacities are getting rapidly eroded. As a result the net operational accretion to capacities is far below the gross investment, which raises the capitaloutput ratio significantly.

3.52 The Ninth Plan will lay great emphasis on improving the productivity of existing assets. The first step in this process is to improve the financial viability of public authorities through sensible pricing strategies and reduction of non-transparent subsidies. The Planning commission will closely monitor the maintenance programmes of major public assets in order to ensure that they are kept on good operational condition.

3.53 In most cases, revamping and modernising of existing assets require considerably less investment than fresh investment in green- field sites for the same effective output. The Ninth Plan will give priority to such investment as compared to proposals for creating green-field capacities.

3.54 The other important methodology for improving effectiveness of public sector activities is through proper targetting. This is particularly important in. anti-poverty and employment programmes and in the social sectors. The Ninth Plan will give special attention to concentrating these programmes towards the more vulnerable groups, particularly the poor, in specific areas and regions where deprivation is most acute.

3.55 Existing efforts at improving the economic conditions of the poor and underprivileged are based largely upon creation of employment opportunities for part of the year, implementation of land reforms, fulfillment of certain basic needs and providing credit for self- employment. The progress of implementation of land reforms remains sluggish in many parts of the country. In most of the other programmes subsidies constitute an important component, which leads to the danger of mis-use and misappropriation by non-target groups. While these programmes will and should continue to play an important role, with proper monitoring of implementation, emphasis also needs to placed on securing an increase in the real effective wage levels of unorganised workers, especially in the rural areas. Past experience shows that this cannot be realised by legislative action alone.

3.56 An over-all increase in the level of real wages of the unorganised workers will also help empowering them to be able to secure maximum advantage from the other developmental programmes of the government. The very Concepts of democratic decentralisation and empowerment of the people imply a steady reduction in the paternalistic role of the State and increased emphasis on empowerment of the people themselves.

3.57 The strategy during the Ninth Plan will focus attention on bringing about awareness among the unorganised workers about the intention underlying the legislations, encouraging organisation of workers to take advantage of the legislative intentions to the fullest measure, and providing effective redressal mechanisms to enforce their rights.