Looking beyond 100 days of Narendra Modi-led government

Updated: Sep 5 2014, 07:11am hrs
Governance, execution and delivery are key to a turnaround and future growth. This sensitisation has been demonstrated well in these 100 days of the Modi-led government. It is, perhaps, not fructuous to lay out a short-term report card of the government as the impact of most measures must really carry to the medium and long-term.

A positive change in mood is evident. While one can debate over the need and relevance of big bang reforms, the government has rightly taken multiple small steps in the right direction.

Revitalisation of the economy, and the true central objective of creating jobs, requires a setting conducive to entrepreneurship and investment. The role of the government is to be the facilitator by setting fair ground rules and non-intrusive regulations, minimising discretionary space.

The first budget of this government made a good start, offering improvements in tax policy, laying emphasis on expansion of economic activity across sectors and initiating steps towards prudent management of public finances. Outside the budget, many progressive announcements were made to facilitate revival of capex and growth cycles. Raising the cap on foreign investment in defense, allowing FDI in railways, digitisation of approvals and clearances, and the thrust on infrastructure and SMEs, all support the national development agenda. Given that the stage has been set for growth and development, we believe the government will expedite the pace of tax and other policy reforms.

First, tax terrorism in all forms must go. Tax terror occurs when unreal targets and revenue bias become acceptable behaviour. Sustainable, healthy revenues require a much wider tax-base, on both direct and indirect fronts. Aggressiveness in tax collection is best directed towards those willfully outside the tax net. Differentiated tax policies distort equity and lead to misuse and tax evasion.

It may be time to consider taxing all incomes above some minimum threshold, including income that may be agricultural or disguised as such. As suggested by the Kelkar Committee, tax rental arrangements between Centre and states can be considered, with states passing resolution under Article 252 of the Constitution, authorising the Centre to impose income tax on agricultural income, and such tax collections by the Centre may be assigned to the states. The government may consider exempting agricultural income up to R10 lakh, which will ensure that a real majority of farmers remain unaffected. This move even with a high exemption limit can mitigate tax evasion and mobilise resources.

Second, GST needs to be implemented at the earliest and we are glad to see positive action and aim for consensus for effective implementation. Setting higher rates or keeping several items out of GST will not bring the desired results.

Third, on transfer pricing, greater clarity is required in avoiding applicability of transfer pricing to capital raising, as well as taxing capital raising based on valuations. Provisions deeming portions of capital to be income are serious deterrents to genuine transactions while leaving the door open for aberrant behavior.

In well-known cases, transfer pricing principles are sought to be applied even when effective ownership is unchanged and no transfer takes place. Domestic companies also come under the ambit due to changes made in 2012 relating to valuations in unlisted companies. The methods prescribed on values are, in the present context, irrationally based on assets instead of relying on the underlying potential, or a fair issuer-subscriber contract. This needs fair correction.

Fourth, the government must re-visit the fundamental relevance of GAAR with reference to our need for capital. There has been enough debate and now that the government intends to move towards simplified taxation, it is suggested that this issue must be buried as we proceed further.

Fifth, the government must re-consider budget proposals disallowing CSR expenditure as business deduction. Spending outside business purposes amounts to appropriation of profits. Other than shareholders, no one (including the State), can rightfully direct appropriation outside a balance-sheet; therefore, this may well lead to judicial challenges unless this expenditure is considered business expense, as in the past. Further, given the lopsidedness between tax benefits (for example contributions to PM relief fund being allowed as deductions), the new provisions run counter to the intent of promoting corporate participation in CSR which now risks becoming cheque-book philanthropy.

Sixth, we see an ambitious disinvestment target, which can be achieved only through timely intervention. The government should act sooner on disinvestment to take the best advantage of the healthy capital markets. Speed of action and sharing information on disinvestment plans will facilitate this objective.

Finally, subsidy reforms need to be expedited. We look forward to the report of the recently constituted Expenditure Management Commission and hope that it will lay a roadmap for rationalisation of subsidies and bringing efficacy in administration of social programs. Direct Cash Transfers must be aggressively followed for better and effective targeting of subsidies, especially following launch of the Pradhan Mantri Jan Dhan Yojana.

The new leadership has set a progressive direction by articulating an economic vision centered on an investment and growth friendly environment. We are confident that further action and reforms will follow.

Sidharth Birla

The author is president of

Federation of Indian Chambers of Commerce and Industry (FICCI)