Fiscal response to the Covid crisis

Fiscal response to the Covid crisis

Fiscal response to the Covid crisis

Fiscal response to the Covid crisis

Hitesh Gajaria | Partner,

A recent International Monetary Fund (IMF) blog, Fiscal Policies for a Transformed World, by Vitor Gaspar, director fiscal affairs department, and Gita Gopinath, chief economist, reiterated that while countries will need to keep public health response at the top of their priority list, they will also need to retain supportive and flexible fiscal policies.

Globally fiscal support policies encompass: (1) above-the-line measures directly affecting revenue and expenditure — for example, deferral of taxes and cash transfers, and (2) below-the-line support, including public sector loans, equity injections and government guarantees.

India’s “Atmanirbhar” package being largely focused on providing liquidity had little affect on the exchequer. Our monetary above-the-line measures have rightly focused on the neediest sections of society and comprise insurance coverage for healthcare workers, substantial cash and in-kind (food grains, cooking gas) transfers, as well as wage and unemployment support to poor households.

Tax deferrals by extending filing deadlines and reduction in interest for late payments provide minor relief. India’s below-the-line support measures include equity infusions for micro, small and medium enterprises, full guarantees for a collateral free lending programme, partial credit-guarantee schemes for non-banking financial companies and equity infusions for companies in the electricity distribution sector by state-owned enterprises, Power Finance Corporation and Rural Electrification Corporation.

Fiscal policies will need to remain supportive and flexible until a safe and durable exit from the crisis is secured. The IMF cautions against a premature fiscal withdrawal as it risks derailing the recovery, leading to even larger future fiscal costs.

This crisis is transformational and many of the jobs eliminated now are not likely to return. Efforts, such as retraining and reskilling, will be necessary to transition human resources from sectors that may permanently shrink, such as air travel, to sectors that will expand, such as digital services.

It is common knowledge that governments around the world have propped up national airlines through huge support packages, even going to the extent of nationalising them. The government of India has been trying to privatise Air India for some time now, including at this particularly difficult time, even as most other private airlines in our country are struggling for survival. It is critical that any buyer of Air India also has contingency plans to reskill its employees, in addition to a plan to revitalise the airline.

Swift and determined actions to improve legal mechanisms for resolving debt overhang and preventing long-run economic damage are needed. India has suspended initiation of fresh insolvency proceedings for a period of six months to shield companies affected by the outbreak of Covid-19. Across nations, fiscal deficits are expected to breach previous benchmarks. Even as current borrowing costs are at historical lows and projected to stay that way in future, these could increase rapidly due to high uncertainty surrounding economic forecast, especially for emerging economies such as India.

Governments need to pursue robust medium-term tax policies that rely on improving revenue mobilisation — including through minimising tax avoidance and increasing tax progressivity where appropriate. To combat tax avoidance, India has already embraced concepts from the Base Erosion and Profit Shifting (BEPS) OECD report in its domestic legislation (through General Anti Avoidance Regulations, Place of Effective Management, and the like) and sought to prevent tax treaty abuse by opting for the multilateral instrument.

Given that the government just last year reduced the headline corporate tax rate to boost India as a manufacturing destination, it looks difficult to reverse gears immediately. Could we see the maximum marginal rate, already at 43 per cent for individuals, go up even further? A few other countries have maximum marginal rates of individual tax exceeding India’s. However, it must be remembered that they have strong social safety nets for all their residents, an idea which thus far has been difficult to fully implement in India. Could we see a revival of wealth tax and estate duties/inheritance taxes? Our experience shows that it has not been feasible to make these effective measures of wealth redistribution and instead these have encouraged tax evasion.

Moreover, as economist Arthur Laffer showed, raising tax rates beyond a point, does not result in a linear increase in tax collections. In the area of subsidies, the government has limited maneuverability as the lion’s share of our subsidies is consumed by food, fuel and fertiliser, critically sensitive areas directly affecting the poor.

Even as the IMF prescriptions are sound, currently the government has limited space to either introduce new or increase tax measures or to cut major expenditure. Instead what is possible is Indian revenue authorities using better data mining to improve risk assessments and profiling of taxpayers to increase tax collections. Faceless tax assessments and appellate procedures, logically following from online filings, have the potential to enforce better tax compliance. What is immediately needed is more rigorous training of revenue officers, many of whom are already technology savvy. Revenue authorities already have the advantage of possessing humongous data collected through foreign and domestic sources.

Intelligent sifting of this treasure using artificial intelligence tools can widen the tax base in our vast, populous and diverse country. One should expect robust tax audits, collection, recovery and enforcement measures from the Indian revenue department. Officers must also move from being tax enforcers to tax facilitators. The Covid-19 crisis should nudge a transformation process to ensure effective utilisation of manpower, infrastructure and communication. A fair and even-handed tax administration fulfilling its responsibilities without any fear or favour is indeed a national asset to be aspired for and nurtured.

A version of this article was carried by Business Standard on 28 July 2020