No more band-aid tax policy

Jun 07 2014, 03:43 IST
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SummaryIndia’s effective corporate tax rate, almost equal to the stated 30%, has killed the corporates and the economy

There can be many positive side-effects of the Modi-BJP mandate. The electorate has provided the BJP with a free, unrestrained hand in charting India’s economic and social policies. Some of the structural changes demanded by the electorate will require deft manoeuvring between the Centre and the states or between the Lok Sabha and the Rajya Sabha. However, the forthcoming Budget, i.e., the maiden tax and expenditure policy document of the new government, is per se only constrained by the imagination, thinking, and boldness of PM Modi and FM Jaitley. They have only two choices in formulating the Budget. Either they continue with a little bit of tinkering here and a little bit of band-aid there. This is the policy followed for every government of India Budget with only one exception (February 1997) since the breakthrough 1991 budget. Or, they decide to chart an intelligent new course in formulating tax and expenditure policies.

India Tax

Let us start with some no-brainers. Given the state of the economy, tax increases are ruled out; equally, rationalisation of expenditure is ruled in so that the net result is that India embarks on a structural fiscal reduction path, a program that gets India to a Central fiscal deficit of 3% of the GDP and a consolidated Centre-plus-state deficit of around 5.5 % of the GDP. This will entail a reduction of around 2.5-3% of GDP from the present obscene levels. This and a subsequent column will discuss how corporate and personal income taxes can be restructured according to non band-aid thinking.

Around the Western world, there is heightened concern about rich fat-cats increasing their income at the expense of everyone else. There was the 99% Occupy Wall Street movement, and now there is the economist Piketty’s recommendation that there be a super fat-cats tax. The jury is still out on increasing tax rates for wealthy individuals and rich corporations in the West. In India, the tax-the-rich recommendation has preceded Piketty by at least five years. Perhaps we should call it the Sen (Amartya)-NAC-Piketty policy of taxation.

In India, corporates are already taxed at the highest effective rate in the world. (An effective tax is simply the ratio of the tax paid to income earned. The difference between the stated nominal and the actual effective arises because of legal tax deductions). And this sock-it-to-the-rich fat-cats policy has had very

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