Sukumar Mukhopadyay :Economists versus Bureaucrats
Economists versus Bureaucrats
There is always an ill-concealed feeling that in the economic domain, the contribution of the civil servants who really run the show on a day to day basis is much more than the theoretical economists who give suggestions on a general basis. The bureaucrats think that they matter more. The economists on the other hand think that the real ideas come from them and it is only for the bureaucrats to implement them. Some economists, however, have the habit of lamenting that their suggestions are not put into effect. I have heard both sides since I have worked for a long time with professional economists after my retirement. I am giving below a list of important changes which were brought out in the direct and indirect taxes department in the last so many years. The final decision about who matter more can be left till the conclusion paragraph comes. The changes are the following.
MODVAT (Modified Value Added Tax)
In 1986, the MODVAT, that is, the Modified Value Added Tax was introduced at the behest of the economists. The report on the tax reforms was written by Dr. Raja Chelliah. Of course the officers are consulted while writing the report and I was also consulted during that time when I was Collector of Customs, Calcutta. Dr. Raja Chelliah Committee consisted of economists mostly and there was just about one bureaucrat in it. The idea of MODVAT credit came from the Committee and it was for the bureaucrats to only devise the methodology for implementation. MODVAT later on was replaced by CENVAT which is more of a change in name. But a bigger change was to come in 1994.
CENVAT for Capital Goods
In 1994 CENVAT for Capital Goods was introduced. Earlier it was only raw materials which would get the advantage of its input duty being given credit. In 1994-95 Budget it was estimated that if the input duty of Capital Goods was to be given credit, then it would mean that one thousand crore of rupees would have to be given as credit. The Government could take the risk because of two factors. First, it would lead to growth and secondly, revenue would also come from service tax which was being introduced simultaneously.
Service Tax was introduced in 1994-95 Budget. This was along the line of recommendations by the Raja Chelliah Committee Report.
The initial enquiry and recommendations about the number of services to be brought under the tax net was made by the National Institute of Public Finance and Policy which is a research organisation funded partially by the Finance Ministry. It works as an autonomous body for research on fiscal policy. It recommended several services to be brought under the tax net but the Ministry chose only a small number of services in the beginning. The Ministry also decided to bring the service tax law as a part of the Budget so that it could be brought into effect immediately. Had it been brought as a separate law, the parliamentary process would have taken much longer time.
Comprehensive Service Tax in 2012
At the initial stage service tax was introduced on a selective basis. Every year in the Budget, a few more services were added. Several economists started pointing out the defects of a selective system. They argued that the service sector was growing faster than the manufacturing sector and the tax on this growth was not tapped if the service tax is not made comprehensive. Comprehensive service tax means that all services would be taxed excepting those which are in the negative list. This way there would be no problem of defining taxes which was a serious problem in a selective tax regime. It was also felt that since the comprehensive goods and services tax was to come soon, making a comprehensive service tax would be a first step towards that direction. This was achieved by making a comprehensive service tax in 2012. The advantage has been that the difficulties in implementing the comprehensive service tax would now come out on the surface so that the necessary rectification can also take place. It must be said to the credit of the administrative ministry, that is, the Ministry of Finance, Department of Revenue, that it has been implemented properly without much of hiatus. This is mainly because a concept paper was circulated not once but twice so that the analysts could point out several defects in the concept paper and offer suggestions to get over them. However, it is to the credit of the economists that the concept of comprehensive service tax was supplied by them.
Value Added Tax (VAT)
At the State level there was sales tax which has been converted into Value Added Tax in April 2005 when some States joined while others joined later. This idea also came from the economists. It was, of course, implemented by the bureaucrats.
Goods and Services Tax
Goods and services tax is likely to come next year or year after. The whole concept of combining goods and services together came from the economists, not necessary from the Indian economists. It was, therefore, more than fifty years in other countries with the notable exception of the USA. The Indian economists made out a case for introducing it in India. Both the NIPFP and the Kelkar Committee Report made specific recommendations to the effect that GST should now be introduced after having introduced VAT at the State level and CENVAT at the Central level. GST would be a combination or amalgamation of CENVAT and VAT. An Empowered Committee of Finance Ministers of the States has been created a few years back to give effect to the idea. The necessary amendment to the Constitution is also on way. GST is likely to come sooner than later. When introduced it will be to the credit of the economists but if it is introduced properly and effectively, it will be to the credit of the bureaucrats.
Advaloremisation of specific customs and excise duties
During 1993-94 Budget we introduced advaloremisation of rates of duty. This means that wherever there were specific rates of duty, we converted them into advalorem duty. This was both in Customs as well as in Central Excise. The idea was that if there was an inflation, the benefit of inflation should come to the Government in the shape of higher collection of duty. At the same time this brought enormous simplification in the tariff structure. I remember that different types of electric bulbs attracted different rates of duty. There was enormous controversy because the elements in the electric bulbs determined the identity of the bulbs. For that reason we had to consult several technical books and the decision used to be quite difficult to take. With the duty being based on the value of the bulbs, at one stroke, all the controversy was resolved. This decision for advaloremisation was taken by the economists namely the Finance Secretary and the Finance Minister who were economists. Most probably the recommendation for advaloremisation of rate of duty was one of the twenty two ‘conditionalities’ that the International Monetary Fund which also consisted of economists. I well remember that as Member CBEC (Budget) when I consulted the Collectors (as they were known at that time) of Customs and Central Excise, they invariably were in favour of specific rates of duty because that gave them an easy system for collection of duty. They did not realise that even specific duty was very difficult to collect where the descriptions were of technical nature as in the case of electric bulbs. At the same time they also did not realise that ad valorem duty imbibes into the system the advantage of collecting more revenue in the case of inflation. The bureaucrats usually consider their immediate administrative problem while advocating for any economic measure. They do not keep the macroeconomic picture in view. There are, however, exceptions to this generalisation but by and large that is the position. On the other hand the economists keep the macro economic considerations in view while giving their opinion.
Harmonisation of customs, excise tariffs and import license
At the instance of the Customs Cooperation Council the tariff for Customs has been harmonised between different countries. This has enabled all countries in the world to have the same tariff description for different commodities with eight digits or twelve digits sub classification. This means that if in an invoice issued from a supplier in France which describes some iron and steel tubes and pipes with under tariff heading 7303, then the description of it would be understood by the exporter in France and importer in India in the same way. Further harmonisation between Customs and Excise tariff and import license descriptions has taken place which has made it much easier to classify goods both for rate of duty and import license.
Reduction in the average rate of duty on customs, excise and income tax
One of the recommendations of International Monetary Fund was to reduce the rate of duty on imported goods, manufacture goods and on income tax. This was achieved during the budget made in 1991 onwards. In 1980s the average customs duty was about 70%. I remember that in 1994-95 Budget when we reduced to the import duty on steel from 72% to 50%, there was a huge furore from the indigenous steel industry but we did not relent. Reduction in excise duty was of course welcomed by the Indian industry. Indian industry could be partially silenced because the problem created by the lower import duty to them was offset by lower excise duty. Income tax rate also came down from the highest slab of 95% to the modest rate of 30%. This stable rate is continuing.
Reduction in the baggage duty from 250 percent to 50 per cent
This needs particular mention since very high rate of 250% on baggage created an unnatural situation at airports and also in the markets. Raids in markets to recover imported goods and adjudicating such cases were nothing less than nightmare. We used to have godowns in the Custom Houses where people would come flocking to buy a few cosmetics or clothes. That memory should better be forgotten. At the instance of economists we went on reducing the rates of duty. There was a lot of resistance in the Department from the strict-stars.
Import of Gold on payment of duty
At the instance of economists this idea of allowing import of gold on payment of duty, the bureaucrats objected. I remember that from the Directorate of Revenue Intelligence the opinion that was expressed was not in favour of import of gold on payment of duty. However, the view of the economists prevailed and now because of this, the incidence of smuggling of gold is no longer a problem.
Some of the other reforms done at the instance of the economists are the following:
i. Removing quantitative restriction, or QR on imports
ii. Reduction on non-tariff barriers
iii. The fiscal responsibility law
iv. MAT or minimum alternate tax – on the income tax side.
The conclusion is that all these reforms have been done at the instance of the economists while the implementation has been done by the bureaucrats. The bureaucrats have always been consulted while making these suggestions by the economists at every stage so that the suggestions are more practicable to implement. When a Budget is prepared, it is the economists or the Minister who supply the macro-economic approach. If the bureaucrats can implement them properly, then it makes a lot of difference. It is not always a matter of high policy. More often than not, there are policy issues which can be implemented by the bureaucrats while changing the notifications, simplifying the system and abolishing notifications. Such things are not examined or dictated by the Minister. The bureaucrats have their role in implementing reform within the set up already given. Economists and bureaucrats have their own role in introducing and implementing reforms.