Sunday 26 April 2015

Manmohan’s Break Industry to Modi’s Make in India (Sunday Guardian)

M.D Nalapat is the Editorial Director of The Sunday Guardian.

A tax structure needs to be created that focuses on growth, for only high rates of growth will generate a stronger stream of revenue.

PM Narendra Modi
Minimum Government and Maximum Governance" was the battle cry of Candidate Modi during the 2014 Lok Sabha polls, and it resonated with a populace that has tired of enduring an official machinery steeped in the colonial tradition of control and confiscation. Recently, several existing laws have been sent where they belong, to the graveyard, but almost all of these are edicts which have very little to do with the lives of ordinary citizens. What needs to get flung into the wastebasket are major laws, each made for the purpose of creating obstructions to productive activity, so that at each such chokepoint, bribes get collected and decision-makers in government enriched. For those with black money, navigating the system is easy, but for the honest, the obstacles are usually too many to be overcome. Every year should have seen a new Wipro or an HCL or an Infosys come up, but looking at the past decade, all that is discernible are the skeletons of startups, which were based on brilliant ideas but which perished as a consequence of administrative obstacles to their functioning.
An example is the proposal that every citizen going abroad detail every item of his or her expenses and the source of funding. An academic who goes abroad to give lectures or to attend conferences could, for example, be questioned on just how he or she paid for the lunches and dinners taken, and hence would need to record the names, addresses and contact details of every person who hosted a tea or a cab ride. As it is, holding a conference in India has become difficult because of the need to get prior sanction of the MEA and the MHA. Now even attending meetings abroad will be an obstacle race with the tax authorities.
A surer way of ensuring that revenue loopholes get plugged would be to scrutinise high value exports and find out whether the prices got bear any relationship to similar exports made from other sources, or if the goods have been exported to shell companies which immediately resell the same at much higher prices. As for imports, it could easily be checked whether such imports are at a price that is above those charged to customers in other countries. In the Indian case, we have as an example the purchase of aircraft by certain airlines at prices much higher than that charged for the same model to other airline companies operating in the country. By going after hundreds of thousands of cases rather than concentrating on the few hundred which generate over 90% of the illicit money made through foreign exchange fraud, officials in India are resorting to the familiar method of releasing large quantities of chaff (by widening the net in an absurd manner, as with the foreign visit details) so as to enable big depredators to escape.
Who can forget such measures as the Fringe Benefits Tax or the tax on ESOPs, which collects tax based on a value that may never be seen in practice? This tax, as many others such as Service Tax, mandate that payment be made in short order to the tax authorities, often even before any income has been received. Once such an advance collection of tax be made in the case of GST (which has been pegged at a very high level), several more SMEs and even much bigger enterprises will go bankrupt.
The obsession of several in government remains the squeezing out of money from the citizen. Instead, a tax structure needs to get created that focuses on growth, for only high rates of growth will generate a stronger stream of revenue. The principal reason why the direct tax base of India is so low is that few now on the outside wish to enter into a system where arbitrariness is the norm, and where such guarantors of financial ruin and insolvency as 300% penalties plus of course interest are routine. After the Vodafone imbroglio, there has been no greenfield investment in telecom from abroad, and after Cairn, there is unlikely to be much interest in the offshore energy sector, while the (tax-induced) demise of Nokia or Posco in India is a cautionary tale to those looking at setting up manufacturing facilities.
India is the only democracy in the world where tax raids take place on the flimsiest of grounds, and which last for days (and nights). Unlike during the Vajpayee government, when valuables and cash found were returned after an inventory was made, since Circa Chidambaram such items are taken away. From Saral to the present version of the income-tax form, as yet too few of the regulatory and fiscal tortures and lunacies introduced during the Manmohan Singh era have been reversed. If investors are to be incentivised to make in India, rather than get broken by the administrative system as they have been thus far, policies need to be implemented that make the economy grow by freeing citizens of the death grip of a colonial-minded bureaucracy, which has smothered a vibrant people. Nothing less than changes relevant to the 21st century are expected from a government brought to office on the promise of comprehensive change.

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