THE ECONOMIC IMPLICATIONS OF THE UNION BUDGET, 1970-71

By Professor Russi Jal Taraporevala

Summary

Professor Russi Jal Taraporevala’s lecture, delivered under the auspices of the Forum of Free Enterprise in Bombay on 3 March 1970 and reproduced from Commerce of 14 March 1970, offers a closely argued critique of the Union Budget for 1970-71. He opens with a survey of the economic backdrop: national income at constant prices, having grown by only 1.8 per cent in 1968-69, is estimated to have risen by around 5.5 per cent in 1969-70, restoring some momentum after the drought years of 1965-66 and 1966-67. Foodgrains production reached 100 million tonnes in 1969-70, industrial production grew by 7.2 per cent between January and August 1969, capacity-shortages were re-emerging in steel, staple fibre and aluminium, the domestic savings ratio had risen to 9 per cent of national income, and the wholesale-price index was renewing its upward pressure from late 1969.

Against this background he walks through the budget’s main tax proposals — Rs. 170 crores of total fresh taxation, of which Rs. 155 crores fall on indirect taxes. He works through the changes in customs and excise (jute manufactures, motor spirit, kerosene, furnace oil, sugar, synthetic fibres, polyester, a 10 per cent ad valorem net on a wide list of consumer items) and on postal and telegraphic rates, noting the inflationary risks of spreading thinly-distributed levies across a broad consumer basket. He then turns to direct taxation — income-tax slab changes that lift the top marginal rate including surcharge to 93.5 per cent, the Bhoothalingam committee’s simplification recommendations, the plugging of loopholes through discretionary trusts and urban agricultural-land capital-gains, raised corporate disallowances of guest-house and entertainment expense, sharply stepped-up wealth-tax rates, an additional wealth tax on non-business urban property, and gift-tax rates aligned with estate duty.

Taraporevala’s central judgment is that, while the direction of the development effort is sound and the budget rightly seeks to spread the tax net wider in the name of “Towards Growth with Social Justice”, the direct-tax proposals are “heavy and indeed harsh and confiscatory”. He argues that the combined burden of income tax and wealth tax can produce an effective ceiling of about Rs. 25,000 of unearned income on individuals in the Rs. 70,000–Rs. 1 lakh wealth bracket, and amounts in higher brackets to “continuous confiscation” of capital. The proposed rates, he warns, are likely to depress incentives to work, save and invest, drive evasion, and risk economic maldistribution if the Plan’s administrative machinery falters. He closes by urging that the income-tax and wealth-tax proposals be reconsidered in light of an individual’s gross income and that the country’s prospects depend on “sound economic policies”, reasonable taxation, and a healthy political fabric.

Key points

• Sets the stage with national income recovery: from a 1.8 per cent rise in 1968-69 to an estimated 5.5 per cent in 1969-70, against the Fourth Plan’s 5–5.5 per cent target.

• Tracks foodgrains recovery to about 100 million tonnes in 1969-70 and industrial growth of 7.2 per cent between January and August 1969, while flagging capacity shortages in steel, staple fibre and aluminium.

• Notes the rise in domestic savings to 9 per cent of national income but warns of renewed upward pressure on prices from November 1969 onward.

• Walks through customs and excise changes — jute manufactures, motor spirit, kerosene, furnace oil, sugar, synthetic fibres, polyester and a 10 per cent ad valorem levy on consumer items — and treats them as broadly inflationary.

• Welcomes the plugging of discretionary-trust and urban-agricultural-land loopholes and the raising of disallowances on corporate entertainment and guest-house expenses as steps toward equity.

• Identifies the budget’s most serious flaw in its direct taxes: top marginal income-tax including surcharge of 93.5 per cent, and wealth-tax rates that combine into a “penal and confiscatory pattern” above Rs. 8–10 lakhs of wealth.

• Warns of an effective ceiling of about Rs. 25,000 unearned income for individuals with wealth between Rs. 70,000 and Rs. 1 lakh, calling continued capital accumulation in higher brackets effectively confiscatory.

• Concludes that the direction of development is sound but that progress requires sound economic policies, reasonable taxation, and reconsideration of the harsher direct-tax proposals in light of a taxpayer’s gross income.

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