Intro: There is a tremendous amount of waste in the Indian tax system which simply needs proper governance.
As India starts a new journey under Prime Minister Narendra Modi with sky high expectations on the developmental and public services fronts, the government cannot take any chances to go wrong in its assessment of both the national needs and the financial means to meet those needs in a sustainable manner.
So far, a major roadblock on India's path towards economic progress has been its dual failure on fronts of revenue generation and optimal use of the available financial resources in implementing developmental and social welfare policies of the government. Governments in India have been forced to live perpetually with a huge budget deficit and an enormous debt. Presently, India spends 60.27% of its tax and other revenues just on servicing the debt. This means that over 60% of the tax revenues are just not available for government programs. (See Chart on 'Disbursement of Revenues 2012-13)
Luckily, the comforting news is that there is a tremendous amount of waste in the Indian tax system which simply needs proper governance. A good cleaning of the system will in itself result in increased revenue collection, thereby closing a part of the tax gap without any substantive changes in the tax code.
Given the challenging economic environment in the world today, most of the tax reforms exercises are revenue neutral. As a result, it is the pushing political needs which have been leading to shifting resources between conflicting requirements. However, the new government's resolve to infuse new funds into the economy through overhauling tax policies and attracting investment from newer sources holds the most needed promise.
The final success of Modi government is going to be decided by how effective command it finally gains over generation of Tax revenues and how efficient it proves itself in getting the best mileage out of each Rupee spent on its programmes. All initial indicators so far show that the developmental and other economic policies of the new regime in New Delhi are going to be more interrelated and hence hold a larger promise. Under this new paradigm, a far more and dynamic collaboration will be expected between different parts of the government than what Indian system of governance has been used to till now. In such a system where one decision in one section of the economy leads to a substantial impact on many other elements, related to each other directly or indirectly, the system will require a robust system of data and numbers which should help the policy makers in understanding and predicting these impacts before a decision is taken.
To meet above challenges, the government would need to enhance and build analytical capacity both within and outside the government to ensure that each tax policy is vetted by more than one credible source and its impact is fully understood by all stakeholders. Such evidence based analytics, when developed, would be responsive to the needs, timely with quick turnaround, equally and easily understood and appreciated by the policy makers and population alike. While it will avoid budgetary overruns and thereby instil self confidence among policy makers on the one hand, it will automatically generate respect and understanding towards them among the opinion makers and the public on the other hand.
MICROSIMULAION MODEL – A ROBUST TOOL
This ability to properly analyse tax and expenditure policies during the pre-decision stage with the help of a reliable database has, of late, come to stay in the form of Microsimulation Models in most of successful economies across the world.
A microsimulation model is a computer model which operates at the level of the individual unit; level at which policies operate, such as a person, a family, a firm, or a property. These models simulate large representative populations of these entities in order to draw conclusions that apply to higher levels of aggregation. These models generally work on data from disparate sources including both the administrative and survey data. This also falls in line with the increased emphasis by the Modi government on technology as a means to exploit data to push changes in India both in the area of targeted policy development and its implementation while at the same time tracking their impact.
In practice, the microsimulation approach to producing estimates of the effects of proposed changes in government programs involves obtaining inputs from micro level databases of individual records, mimicking how existing and proposed policy provisions apply to individuals in those records, and maintaining the simulated outputs from the two scenarios for further analysis.
Any policy which operates at the individual level directly (e.g. taxation, social welfare, retirement, education) is amenable to microsimulation modelling. A microsimulation model helps to both design and estimate the impact of such policies, in the present as well as in the future.
A good microsimulation model would perform the following tasks in the exercise of evaluating the possible impact of a proposed new tax policy decision or in evaluating the impact of a proposed financial decision on a social welfare project:
- Help identify who will benefit, by how much, and what would be the program cost to the treasury. This is necessary to ensure that policies achieve their stated objectives within the budget outlays;
- Provide a credible means to monitor the implementation of the policy and its impact which iscritical to the uptake of any policy;
- Help identify and forewarn about over runs and other shortcomings while the policy is being implemented to avoid major setbacks;
- Generate tax expenditures related to various components of the tax system. This is essential in understanding the amount of indirect benefit to individualsand businesses in tax savings and the cost of the foregone revenues to the government. A good model will help you analyse these impacts and guide the policy maker on how best to provide specific benefits to special segments of the society in the most cost efficient and practical way – whether through tax expenditures(a tax deductions or exemption) or through an explicit transfer program or a refundable tax credit;
- Provide internally consistent estimates of new and existing policies;
- Allow simulation of any tax changes, like rate structure, deduction and exemption levels, program design with eligibility criteria, a refundable tax credit to offset other policy changes (such as regressivity caused by GST) as well a thorough overhaul of the tax system or tax reforms;
- A good model would also provide guidance on resource requirements (e.g. for the Revenue department) in implementing certain policy initiatives, and
- Allow the policy makers to analyse a host of policies simultaneously – appreciate the inter-relatedness of policies and ensure internal consistency of the estimates while keeping a tab on the overarching government objectives.
Dr Anil Gupta (The writer is Canadian national of Indian origin, an international expert in developing Microsimulation Models for governments)