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What Modi Must Do Now - Part 2 - Arindam Chaudhuri - The Sunday Indian
 
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What Modi Must Do Now - Part 2

 

ARINDAM CHAUDHURI | New Delhi, June 6, 2014 12:58
Tags : Arindam Chaudhuri | Narendra Modi | Black Money | DTC | GST | TDS |
 

In my previous editorial, I had written the first of a two-part editorial on what must Modi do, now that he's in power. In that editorial, I had suggested that Modi must first focus on transforming the judiciary, improving education and healthcare services, and initiating employment generation schemes and slum-removal schemes to give people dignified existence. Continuing with that, here is the second part of my editorial on what else must Modi do:

Legalizing Black Money

I have suggested this in the past too; and shall suggest it again verbatim – we should legalize all the black money stashed abroad by structuring a consolidated tax payment of 10% on the black money amount. To sugarcoat the offer, even this 10% could be taken in five equal annual installments of 2%! But this has to be with two key riders! The first one is that the government must ensure that it takes persuasive and decisive action to recover the black money stashed abroad from day one. In this, the government should also ensure that all the black money recovered after one year of the grace period will be nationalized lock, stock and barrel. The second rider is that the government must commit that in the future, there would be structural and financial firewalls to ensure that stashing black money abroad becomes absolutely impossible. At the same time, if there is a functional judiciary, punishing black money holders efficiently and quickly – and thus dissuading future black money transactions – will be an easy task.

Let me put all this in context in the background of the government last week setting up an SIT (Special Investigation Team) to investigate various black money cases, on the orders of the Supreme Court. Some of the current estimates of black money abroad are as high as Rs.75,00,000 crores. If we could legalize all this using the framework suggested above, look at the possibilities – a minimum 10% (or Rs.7,50,000 crore gross) could come into the government's kitty in the next five years (that is, Rs.1,50,000 crore per year); this apart from the fact that the principal bulk of black money would also come back into India. And all this would provide a huge support for the investments required to put into action the allocations I had suggested in my previous editorial, and for other crucial government projects.

Eliminating exemptions and simplifying the tax regime

The Direct Tax Code (DTC) and the Goods & Services Tax (GST) systems had been touted for quite some time by the previous government; but frankly, nothing much happened. While the DTC Bill 2010 got referred to a standing committee – and languished sine die – the revised DTC has been released for comments by the previous government only in April this year. The new government too has given indications that it is not going to follow up on getting the DTC in order and in action. That is disappointing. A similar fate seems to be awaiting GST, which is languishing amidst bickering between various states. Even though I'm not a finance specialist, if I were to go by what my colleagues (who are finance professionals) say, implementing these revised systems could simplify the lives of both corporations and millions of tax payers, doing away with (or at the very least significantly improving) the jurassic income tax system that continues till date. A starting point for all this could be to introduce a truly 'saral' system of taxes than just provide a namesake Saral-II form for lip service, which is most frustrating for those who actually pay the taxes. Another positive and significant step could also be passing a direction that taxpayers with income up to Rs 5 lakh need not be questioned at all by the Income Tax department. What additional tax revenues can you get from the stressed middle class Indian whose income is anyway subject to TDS (tax deducted at source)?

It is evident that the complications in the tax system have ensured that only around 2% of Indians pay income tax, instead of around 10% who should have been paying. Till our tax code continues to remain complicated and continues to encourage tax evasion, we will continue to have corruption in the system. Ergo, the next related suggestion – withdraw all tax exemptions. It might sound completely radical, but implemented in a structured manner, it has the power to put a stop to many kinds of tax evasion. Think about it – why can't we decide on a limit or percentage tax for capital gains, and a similar one for other kinds of income, instead of offering innumerable exemptions, which anyway are mostly incomprehensible to the average taxpayer?

One significant step in this regard could be doing away with the age-old exemption given to agricultural income. It's a well known fact that most of the rich and the famous indulge in owning expansive farmhouses to simply build the facade of agricultural income. There are minimal checks that differentiate such individuals from perhaps the real bottom level farmer, for whom perhaps the exemption was originally intended. If agricultural income is one stark example of how subversion takes place in the system, then excise and customs duties are the other area where evasion is now an almost accepted fact. Talk to any company's tax accountant and he won't be able to deny that such an evasion happens all the while. I am shocked that we can continue to have an income tax system (along with its bureaucracy) with such a dismal corruption and bribery record. Which government can allow such a state of being, where any and every Indian's first thought when they think of our income tax system is that the system is supremely corrupted? And what happens when we allow such a system to continue? Almost 70% of disputes and cases pending in our various courts are related to tax issues. Imagine how improved our judiciary's effectiveness could become if we were to reduce this load from the Indian courts, by solving the issue at the origin.

Modi can do that by removing exemptions and introducing the standard rates that I had suggested earlier. The move could enable additional tax revenues in the system of around Rs 3 lakh crore a year. Compare this to the annual budget combined for all social welfare schemes – that is less than Rs 1 lakh crore.

Abolish the majority of subsidies

The tale of irresponsibly doled out subsidies is as old as the tale of corruption in India. Take a tour of the Indian farmlands and you will see how a significant majority of Indian farmers barely manage to survive, forget investing in modern seeds, fertilisers and farming methods. And still the fertiliser subsidy of India is around Rs. 70,000 crores every year. The previous government has been criticised considerably for their decision in February this year to keep the subsidy at past year's levels only (Of the Rs. 67,970 crore subsidy bill for FY2014-15, imported urea subsidy is Rs. 12,300 crore, domestic urea subsidy is Rs. 31,000 crore and de-controlled fertilisers subsidy is Rs. 24,670 crore).

In similar lines is the story of diesel subsidies. When was the last time you saw a poor man use a diesel car or diesel generator or a diesel pump set? Despite that, the past years have seen diesel subsidies continue without logic. A recent petroleum ministry study mentions that there has been under-recovery of Rs. 92,061 crores on diesel and Rs. 1,39,869 crore on petroleum by our oil companies in FY14. Shockingly, a majority of this, by the ministry's own admission, has gone to the benefit of private car owners. Bloomberg mentioned recently that the only thing the diesel subsidy in India is spawning is pollution and related health issues. For records, only around Rs.12,000 crores of the above mentioned subsidy went to the agriculture sector, where also the poor and subsistence farmer obviously has gained minimally. Similarly, How many BPL families actually use LPG cylinders in their kitchen (when they don't even have a roof to call their own)? Yet, we continue to subsidize LPG cylinders with a bill crossing Rs 20,000 crore per year, benefitting a class of middle class and rich people who actually would not mind paying the additional subsidized amount per LPG cylinder. Similar is the legacy of other subsidies, eating into the Indian economy.

As I mentioned, these subsidies go hand in hand with corruption in destroying our economy. It's now an accepted fact that the kerosene subsidy has fuelled the growth of ruthless mafia empires throughout India, who now control kerosene distribution and even adulterate petroleum and diesel products with the same. Whether it is the kerosene mafia or the land mafia, you cross their path and the chances of you getting killed rise exponentially. If I were Modi, and I really wanted to ensure that the benefit of the so-called subsidies goes directly to the truly poor, then I would take the bold step of abolishing all such subsidies, and actually use the biometric photo identity cards to subsidise goods and services only when the poor purchase it.

I am confident that the new government will introduce changes that have the potential to transform the Indian economy. But until the structural pillars of this economy are not reengineered, we cannot have growth being equitably distributed. That is what Modi must do now.

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