1. If we take exemptions out, we can simplify and lower tax rates

If we take exemptions out, we can simplify and lower tax rates

Panagariya spoke on various economic issues, including demonetisation, disinvestment and the upcoming Budget

Published: January 1, 2017 6:07 AM
(From left) Janmejaya Sinha, Chairman, Asia-Pacific, The Boston Consulting Group, Niti Aayog Vice-Chairperson Arvind Panagariya and P Vaidyanathan Iyer, National Affairs Editor, The Indian Express (EXPRESS PHOTO SERVICE) (From left) Janmejaya Sinha, Chairman, Asia-Pacific, The Boston Consulting Group, Niti Aayog Vice-Chairperson Arvind Panagariya and P Vaidyanathan Iyer, National Affairs Editor, The Indian Express (EXPRESS PHOTO SERVICE)

At the latest edition of Express Adda held at  Express Lawns, Nariman Point, Mumbai, Niti Aayog Vice-Chairperson Arvind Panagariya was in conversation with Janmejaya Sinha, Chairman, Asia-Pacific, The Boston Consulting Group, and P Vaidyanathan Iyer, National Affairs Editor, The Indian Express. Panagariya spoke on various economic issues, including demonetisation, disinvestment and the upcoming Budget

On demonetisation

This was an unprecedented move. The basic objectives of demonetisation will be achieved. I never saw this move as an isolated step. There were half a dozen steps taken prior to this. This being the biggest so far, and I don’t think this will be the last one either. India has a long way to go in terms of setting the policies right. While this is going to be a milestone, and when the economic historians write the history 10 years from now or later, this will be seen as a turning point. But I think there are still more policies to come and we need to follow up and build up on what has been done.

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…its impact on GDP

To make any estimate of what the growth impact is going to be with the available information today is dicey. There is some painful transition that we are going through, but we would more than recover wherever we lose in terms of growth in the current quarter, or may be in the next one. It will be more than recovered as we go forward. We need to ensure that the shift that happens today towards digital transactions as a result of compulsion actually turns into a habit. Whatever can be done is being done and Niti Aayog has been very much involved in this. Many ministries are also doing this. Collectors have been asked, they are in turn going to the block and panchayat levels. So the whole digitisation campaign is being done. Also efforts are being made to ensure that the apps that banks are using are user friendly.

…its impact on jobs

Nobody can anticipate the unfolding. But that being said, I don’t think any of this is going to be permanent. The supply chains that get temporarily disrupted will recreate themselves very quickly. For example, I think of the hurricane that came to New Orleans; it looked like the city will never be rebuilt again and, of course, New Orleans is back to life. And that is the history. Actually, in many cities when they experience some gigantic shock like that, eventually they come back and rebuild themselves. And ultimately, it is all a matter of incentives. People react to incentives and as long as we go in and ensure that we recreate the incentives, which we will recreate when the liquidity is fully there in the system. Many digital technologies would have also been adopted by then, at least by a significant proportion of the population. So I think in the longer run we will come out more stronger.

On the upcoming Budget

This is the Finance Ministry’s domain and the final decision lies with them. It seems to me, against the background of demonetisation, where we are trying to frontally attack black money, this is an opportune time. There are two ways to attack black money. If black money has been created, then you punish those who created it. The second avenue to work at is to create conditions in which black money will not be created in the first place. And that, of course, means going after tax reform. So I’ve been advocating and I very much hope the Finance Ministry moves in that direction and tries to minimise exemptions. In any case, in corporate tax, there is a commitment already in existence. In last year’s Budget, it was implemented for the new companies. Any new company that wants to take advantage of 25 per cent tax rate can do so, provided it doesn’t take exemptions. And we need to keep moving in that direction.

But we should also look back at personal income taxation. If we take the exemptions out, we can not only simplify, but also lower the tax rates. The trick is to expand the tax base, simplify it and minimise the grey area over which the tax official on the ground makes the decision. If the tax laws are fuzzy, it gives power to the tax official on the ground, in which case the room for evasion expands. That is one way to combat the creation of black money. This is a great opportunity to do that.

The author of the article is express features service.

  1. Murthy Suppusamy
    Jan 1, 2017 at 5:59 am
    For Heaven's sake, stop all these un-workable ideas. The Govt wants tax Tom to pay Jerry(Dalits, SC/STs etc). And the Jerry already has reservations in Govt Jobs!. If this keep stretching far, the social fabric knit will break apart!. Today's politicians may not see the wrath of it, but certainly the curse will follow future politicians!>
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