First, Fix a Right Target

Context:  Indian revenue administration’s failure to achieve its budgetary target is reflected in its unrealised tax collections, poor revenue targeting and forecasting.

Implications of Poor Revenue Targeting

• Fiscal Implications:
• May lead to Higher expenditure: in anticipation of higher revenues.
• Higher fiscal deficit: as a result of exceeding expenditure over revenues.
• Non-fiscal Implications:
• Gives rise to detrimental practices:

• Due to pressure at the end of the financial year, tax officers raise unfair demands and take coercive action to realize the targeted revenue.  

• Delayed tax refunds: simply because the department does not want to report a lower figure of net collections.

Reasons behind Failed Revenue Targeting

• Highly skewed top-down exercise : setting a revenue target with hardly any consultations with field formations.

• • • Finance ministries estimated fiscal deficit is communicated to two revenue boards as their targets for the year.
    • Revenue boards (CBDT and CBIC) allocate the targets given to them to their chief commissioners who, in turn, further allocate them to the field formations. 

• Unrealistic budget targeting: At the micro-level, officers often find that the budget communicated to them is highly unrealistic.

• Expecting a fixed percentage of increase in tax over the earlier year’s collection is unrealistic and fails to factor in the variation in tax rates.

Way Forward

• Bottom-up approach: where supervisory officers listen to their subordinates and correct any underestimation of projected revenue.

• The top-level (Ministry) could compare the estimates presented to it by the lower level (Chief commissioners) with its own requirements(of tax-GDP ratio) and act accordingly.

• Fix realistic targets: for the department and encourage it to collect revenue strictly as per the law.
• Reintroduce principles of Management By Objectives (MBO): ensuring participative management in the functioning of the tax department.
• Pushing Systemic tax reform: by income tax department through induction of technology in its day-to-day functioning.