Why only tax payers, rope in the entire nation
for bearing the cost of natural calamities?

By M.N. Minocha

The inevitable was to come. And, it came barely six days after the country's worst-ever natural calamity, the earthquake in Gujarat. The tax shock.

The Union government, which is scheduled to present the 2001-2 budget on February 28, decided on February 1 to promulgate on ordinance to levy an additional two per cent surcharge on income-tax on those with an annual income of Rs. 60,000 and above and an equal rate of additional surcharge on corporate tax. This, according to the government's calculation, will generate an extra revenue of Rs. 1,300 crore. More tremor taxes or surcharges are promised in the forthcoming budget.

Already, there exists a 15 per cent surcharge on both the corporate and income tax, levied ostensibly to cover the cost of Kargil war. The short-lived Kargil war was over two years ago. The surcharge was expected to go at the end of this fiscal. It is now quite certain that the levy will continue under the same name or another head. Thus, the further addition to two per cent tremor tax will make the total surcharge to 17 per cent. This will generate an extra revenue of nearly Rs. 10,000 crore.

However, nobody still has any clear idea about the cost of relief and rehabilitation in the quake-hit Gujarat. The Chief Minister said it would be about Rs. 10,000 crore. The Gujarat Chamber of Commerce said, practically without any basis, it would be Rs. 25,000 crore. There is no official estimate as yet. The question of a central aid can be taken up only after such a reliable estimate. The liability of insurance companies, life and general insurance, will have to be taken into consideration. Gujarat is the country's second most industrially prosperous state, after Maharashtra. Unlike Orissa, which, not long ago, witnessed the worst cyclone in memory, Gujarat has the capacity to absorb at least some financial shock of the earthquake. Several business houses have come forward with financial help, including adoption of some of the devastated villages or settlements. They will lessen the central and the state government's financial burdens.

The government could have probably waited till a proper stock taking of the situation by its official agency or till the next budget. Overseas grants are pouring in. The United States have set up a relief fund under the initiative of the former President Bill Clinton. Overseas Gujaratis and the Gujarati community from other Indian states are also collecting funds for the victims of the earthquake. All these funds cannot be spent overnight. An ordinance is not going to lead to an instant tax collection. The last quarter advance tax is due only on March 31. This is not all. More tax threats and call for sacrifice are being given by senior members of the union government, the Prime Minister not excluded. All this would have been welcome, if the cabinet would have taken a non-traditional route of raising resources by involving a much larger number of citizens in this uphill task of providing relief to the earthquake-hit and rebuild Gujarat, and tap the traditional revenue sources only after that. Instead, the government chose the soft option of taxing the existing assesses, numbering only around two crore in a country which boasts twenty-crore middle class spenders and a population of over 100 crore, to mop up funds for the earthquake victims.

Difficult times call for difficult decisions. And, at this moment, nothing appears to be more difficult for Prime Minister Atal Behari Vajpayee and finance minister Yashwant Sinha than taking a decision on to what extent they could use the forthcoming national budget to pay for the earthquake ravaged Gujarat's reconstruction cost. The initial reaction of both the Prime Minister and the financial minister has been in favour for a "harsh budget". And, the ordinance imposing an additional surcharge on both the corporate tax and income tax just four weeks before the budget demonstrates, if anything, a financial panic and more unpopular fiscal measures the government may be forced to resort to in the forthcoming budget.

Although the immediate concern is Gujarat, which is also one of the few BJP-ruled states, the Union cabinet will make a big mistake if it really resorts to a "harsh budget". Such a budget, instead of helping Gujarat recover from the earthquake, could turn out to be calamitous to the entire national economy. Frankly, this is hardly the right time for a harsh budget. The situation, on the contrary, demands lower taxes, larger tax base and more effective tax compliance. The government's own administrative spending needs to be drastically pruned. A rupee saved is a rupee earned. The government is spending too much money on administration. A lot of it is unproductive.

The reconstruction of Gujarat will not be possible if the whole national economy reels under a harsh budget and a plethora of tremor taxes. Economy has already slowed down. The second and third quarter corporate profits are down, forcing corporates to tighten their belts further by cutting ad spends, travel expenses, hotel bills, gifts, discounts, etc.

The stock market is depressed. More unpleasant budget surprises for the country's elite community of 2 crore direct tax payers, including corporates, to raise large funds for Gujarat will have serious impact on the national economy.

Mr. Sinha cannot ignore the rest of the country and wider economic issues that this budget must address to ensure a higher rate of growth with social justice. The budget must provide for funds to rebuild the whole country with special emphasis to Gujarat. The finance minister must give his budget a special direction. It must help build a strong nationwide communications network - the wide two-to-four-lane cross country freeways, which the Prime Minister had announced a year ago, modern ports and docks, airports, telecommunications system, etc., the infrastructure and the core sector.

The power situation in the country is going from bad to worse. Even the national capital, Delhi is witnessing frequent power cuts. Not much funds have been invested in new power plants in the last seven years since the government went slow in taking up electricity generation through the public sector power utilities. A few private sector units, which has set up power plants in the last few years, are robbing the industry and the pubic by charging very high electricity rates. A high cost power, along with a high cost borrowing, will make the country's economy very high cost and uncompetitive. Mr. Sinha's forthcoming budget must make provision and extra-budgetary support to efficient utilities like the National Thermal Power Corporation, National Hydro-electric Power Corporation, Damodar Valley Corporation and Neyveli Lignite Corporation. The finance minister would do well to provide substantial budget support to the Nuclear Power Corporation to step up new units to generate atomic power, which is the cheapest as well as the cleanest energy for future. Nuclear power accounts for only three per cent of the country's total electricity generation.

The finance minister must provide sufficient funds to build a proper social infrastructure for the country's economic growth engine to move to the next gear. The country's social infrastructure has virtually collapsed because of years of neglect by successive governments. The government hospitals and health centres are in a very bad shape. So are the public schools, both primary and secondary. Good community centres and playgrounds are rare even in districts. The state of drinking water supply and sanitation in most parts of the country is extremely poor. States are breaking all rules to install all kinds of cheap pipes, instead of mandatory cast iron spun pipes for water supply, compromising the health of the people just to save a few bucks. The private initiatives in the area of social infrastructure are highly commerdy to the tune of over Rs. 7,000 crore. In several states, they get free electricity to lift water to lubricate their land. They also benefit almost every year from the revision of procurement prices of their products. This is the season when they are most flush with funds. Mr. Sinha could show some courage to introduce at least a special one-time levy on the incomes of these farmers.

If these non-traditional methods are tapped to raise funds by making the budget a little harsh on traditional tax dodgers, Mr. Sinha will have enough funds not only to meet the government's commitment to Gujarat reconstruction, but take up the high cost national infrastructure programme in the right earnest. Such investments will bring a tremendous boost to the economy by way of creating new employment, generating income, higher demands for both wage goods and consumer goods, leading to more production of goods and services. The fiscal year 2001-2 is also crucial for the performance record of the National Democratic Alliance, led by the Bharatiya Janata Party. A calamity budget, raising extra levies from existing direct and indirect tax payers, can let the opportunity go waste. The NDA will be in no position to broaden the government's tax base by taking unpopular decisions later since that will be too close to the national election. INAV