Covid-induced disruption in economic activity has had a significant impact on revenue collection. Consequently, the Union government has increased its borrowing target by about 50 per cent to Rs 12 trillion in the current year. While an improvement in economic activity with a reduction in restriction on movement has helped improve tax collection, the government is expected to borrow the additional amount to push expenditure, which will aid the revival process. Revenue will improve significantly in the next fiscal year, though from a much lower base, and the government would be expected to start the fiscal consolidation process. The Budget deficit at Union level is likely to settle at over 6 per cent of gross domestic product in the current year. While the government would be expected to consolidate its finances, among other things, it will need to provide for the cost of vaccination, which is being estimated at about Rs 65,000 crore. The government is reportedly considering imposing a cess or surcharge on taxes to at least part-finance this expenditure
in the upcoming Budget.
Given the state of the economy, most economic agents would not be in favour of a higher tax liability. However, it’s also true that in the given situation, with a significant increase in the deficit and public debt, the government will want to mobilise additional resources to minimise the wider macroeconomic implications of its finances. Thus, it makes sense for the government to impose a cess or surcharge to fund the vaccination programme.
However, the government should be mindful of several issues in doing so. First, it will need to present a clear estimate of how much the vaccination exercise would cost. The government doesn’t need to inoculate the entire population and should allow the private sector to run vaccination drives for those who can afford market rates. This will also reduce the pressure on the public health system. Given the potential gains, many firms in the private sector are willing to pay for their employees. It would reduce disruption on factory floors and boost efficiency.
Second, even if the Centre bears the cost of the vaccine, it will need to be administered in the states, which would entail expenditure.
Although the Centre is not mandated to share the cess or surcharge collection with the states, it would do well to support them financially in this case, depending on their need. As a matter of fact, revenues at state level have suffered a great deal and their finances are also under significant pressure.
Third, the government should clearly state that the imposition of this additional liability would be one-time. It is clear that the government needs to increase expenditure
on the health sector, but that should come from the overall expenditure Budget. The additional revenue coming from a cess or surcharge should be used only for the stated purpose. As noted by the Comptroller and Auditor General of India in the past, the government tends to use the funds collected as cess under different heads to finance general expenditure. It must be avoided in this case because it will defeat the purpose and affect public trust. Thus, the window must be used transparently and efficiently.