Looking beyond 100 days of Narendra Modi-led government

Sep 05 2014, 01:41 IST
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SummaryIt is time to focus on tricky issues like GAAR, transfer pricing and subsidies

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

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