The entire tax regime – both direct (personal and corporate income tax) and indirect – needs a revisit. Given that less than 3% of the population shows any taxable income at all, there’s clearly a need to bring many more into the net instead of burdening the already taxed. It’s also high time the field were levelled and rich farmers were made to pay income tax.
Tax rates for personal taxpayers should be made more reasonable, in keeping with infl ation, if nothing else. The salaried class would benefit from reintroduction of standard deduction (a flat amount that is deducted from income, with the balance subject to tax). The bulk of taxpayers comprise the salaried class and reintroduction of standard deduction, abolished from April 2005, is the simplest way to usher in an additional tax reform for this class. This will also usher in equity, as currently individual taxpayers who are professionals or businessmen are entitled to offset their business expenses against income. Salaried taxpayers only get certain tax sops – such as HRA, LTA, medical or transport allowance – but these in large cities translate into peanuts, such as the Rs 800 per month tax-free travel allowance. INDIRECT TAXES: SEAMLESS, PAN-INDIA REGIME
On the indirect tax front, political compulsions have repeatedly delayed introduction of the streamlined pan-India goods & service tax (GST). Value Added Tax, which has replaced statespecific sales tax in most states since April 2005, started off on the right note – with an intent to provide for uniform tax rates, an input tax credit mechanism to prevent ‘tax on tax’, and relatively standard processes. Today, because of local revenue compulsions, states have increased VAT rates and blocked or reduced input tax credit (which allowed a credit for taxes paid on intra-state purchases),
thus hampering pan-India trade. India needs to be a seamless, not a fragmented, marketplace. VAT must be put back on track by bringing about uniformity in tax rates, rules and procedures in different states. In the long run, call it GST or by any other name (say, central VAT or consumption tax), but there needs to be an economically effi - cient indirect tax regime that promotes growth. Many developed countries have introduced a federal consumption tax. This is also emerging as the preferred alternative to customs duties in the context of trade liberalization.
NO RETROSPECTIVE CHANGES
Retrospective amendments to law must be introduced only in the rarest of rare occasions to correct a flaw in the tax provisions and not to earn revenue. Otherwise it will only add to pending litigation (worth Rs 2.7 lakh crore in 2012-13).
REVIEW APPEALS
Areview of the appeals process may be worth undertaking. The first stage of tax appeal in India is the Commissioner (Appeals). Some countries ensure that the appeals division is independent and has no links with the tax department which is responsible for tax assessment, scrutiny and tax demands. In the US, the appeals division is an independent body, whose officers are evaluated based on their ability to settle cases without next-step litigation.
END WASTEFUL GOVT EXPENDITURE
Instead, focus on a handful of critical areas such as education, healthcare, infrastructure and law and order/security, but with a far stricter audit of performance and finances. Give taxpayers a clear, unambiguous idea of where and how their money is being spent. Several ministries, ranging from textiles and steel to culture and youth affairs can be disbanded. Also, the government should exit slothful, perenially-hemorrhaging undertakings like Air India.
ALLOCATE RESOURCES IN A TRANSPARENT MANNER
Some of the biggest corruption scandals of the past several years have arisen out of either misconceived or rigged allocation of resources such as coal, ore, spectrum and land. The 1991 industrial policy of the Narasimha Rao government was meant to usher out the licence raj, but just the opposite has happened;
sale of government-controlled resources has
become the new frontier of talism. The process by which natural resources are allocated to the private sector must be made transparent and designed to serve public interest rather than the government of the day and its favoured few. This can be done once it is recognized that maximizing short-term revenues for the government does not maximize
public interest. Public interest is best served when we ensure a healthy, competitive industry, which is then able to offer goods and services to consumers at a reasonable price. A one-step e-auction, conducted by an independent body, is the best means of addressing these multiple objectives.
BRING BLACK MONEY BACK
Areport by Global Financial Integrity states that India has lost nearly $213 billion (about Rs 14 lakh crore) in illicit capital fl ight since Independence (till 2008). Even if, say, 20% of it can be brought back, through an amnesty scheme, that is close to Rs 3 lakh crore, which is more than the Centre’s annual education and healthcare budgets. The repatriated funds could be taxed at 3-5% above current Indian rates, as a moderate penalty. Three-fourths of it (Rs 2.25 lakh crore) could be exclusively earmarked for spending on health, education and infrastructure, and the remaining one-fourth (Rs 75,000 crore) could be distributed as a onetime rebate among all individual taxpayers in proportion to their taxable income – as a reward for honesty (yes, it might be diffi cult to execute, but worth considering). Total income tax collections are budgeted at less than Rs 2.5 lakh crore in 2013-14. A large inflow of dollars would also help strengthen the rupee. In the US, the American Jobs Creation Act, 2004, offered a temporary tax sop to companies that repatriated dividends by imposing a tax levy of just 5% instead of 35%. However, the repatriated money was allowed to be spent on specific permissible activities like R&D and capital expenditure which would promote growth and job creation. (It could not be used for, say, declaring dividends or for share buybacks.)
CREATE JOBS THROUGH PVT SECTOR INCENTIVES
About 50% of India’s 1.21 billion population is less than 25 years old. The government will need to ensure that the employment expectations of its skilled and educated youth are met – a need that cannot be fulfi lled via government sector employment or funded schemes alone. The participation of the private sector is critical. Tax exemptions, grants for job creation, credits against tax payable, weighted deductions for the cost of new hires and their training costs are some of the variants used globally to encourage job creation in the private sector. Countries such as Hungary, Portugal and Switzerland offer tax breaks for investments that result in a specific number of new jobs. Luxembourg incentivizes both training and hiring – 10% of training costs and 15% of gross salary paid to persons who were earlier unemployed can be offset as a credit against corporate income tax. Direct incentive by way of a cash grant is available on newly created jobs in the Slovak Republic.
PROMOTE FOREIGN DIRECT INVESTMENT
All industries, including retail, media and defence, should be opened up to FDI. The Indian retail market is expected to be worth $500 billion by 2020 and could create up to 100 million jobs in the next 10 years. Also, a decision taken by the Union Cabinet to allow FDI in a sector must be respected across the country; states mustn’t be allowed to block entry.
PRIVATIZE AND DISINVEST AS FAR AS POSSIBLE
PSUs should be privatized as far as possible – especially in industries such as aviation, hotels and steel – but in a fair, transparent manner (just as with resource allocation). Elsewhere, the disinvestment route should be taken.
MAKE IT EASIER TO START A BUSINESS
India ranks 134th among 189 countries, according to a World Bank report on ease of doing business. On ease of starting a business, it ranks even lower: 166. The report says that 35 permissions/procedures are required to construct a warehouse, which takes an average of 168 days. One can only imagine the time and number of clearances it takes to build a factory. Small businesses, too, face frustrating hurdles: for instance, to open a bar & restaurant in Maharashtra, 38 licences are required, many of which date back to colonial times and are outright bizarre. This allows corrupt inspectors to make money at every turn; those who resist, are harassed till they pay up or shut shop. Why should it be so difficult to start a business? It provides employment, creates wealth and generates revenue for government. There’s a crying need to drastically reduce the number of permissions required, set a tight time limit for them to be granted (if all the paperwork is in order) and penalize babus if they take longer. Also, the entire system should be online and transparent.
PROMOTE MICRO, SMALL & MEDIUM ENTERPRISES
MSMEs generate the largest employment (nearly six crore) after agriculture. In terms of value, MSMEs account for 45% of total manufacturing output, 40% of exports, and contribute around 8% to GDP.
But they find themselves stymied by their very regulatory definition. For instance, under the MSME Development Act, a small enterprise in the manufacturing sector is one whose investment is between Rs 25 lakh and Rs 5 crore, and for the service sector Rs 10 lakh to Rs 2 crore, which is too low. Those who wish to expand find themselves bereft of credit – which either flows to the ‘well-defined’ MSME sector or large companies. For growth to be encouraged, there is a need to redefine what constitutes MSMEs. Across the European Union, three parameters are used to define what constitutes a micro, small or medium-sized enterprise: employee strength, turnover, balance sheet value. While employee strength is a fixed criterion, a company can chose to opt for either the turnover or balance sheet criterion. In the MSM ranking, a medium-sized enterprise is one which employs fewer than 250 persons and which has either an annual turnover of less than 50m euros (Rs 426cr) or a balance sheet value of not more than 43m euros (Rs 366cr). If enterprises fall in this range they are eligible for a variety of funding. Providing a tax credit or investment allowance to MSMEs is another solution.
FLEXIBLE LABOUR MKT, BUT WITH A SAFETY NET
Innumerable surveys around the world have shown that labour market infl exibility actually hurts creation of jobs – employers are wary of hiring even in boom time if they are not allowed to trim their workforce in a downturn. A flexible labour market, on the other hand, gives employers the confidence to add staff. But this
must be accompanied by a comprehensive social security programme, including unemployment benefits/insurance and assistance in retraining and finding alternative avenues of income generation. (Obviously, people who have no interest in working cannot be kept on a dole.)
EASE LAND ACQUISITION FOR INDUSTRY
Industry is complaining that the new law will make it very difficult for it to acquire land, even for important infrastructure projects. There is a need for better compensation, but the price of acquisition should not be so exorbitant that it hobbles industry. A middle path that is fair to all sides needs to be found.
No comments:
Post a Comment