TIOL - COB( WEB) - 404
JULY 10, 2014

By Shailendra Kumar, Editor

IN a couple of hours from now, the Union Finance Minister, Mr Arun Jaitley, will be punctuating his maiden Budget Speech with details of mega macro economic reforms, including fiscal reforms. Although every small or big segment of the Indian society appears to be pinning high hopes on the very First Budget of Modi Sarkar but going by the glaring fiscal discomfiture of the Exchequer, the BJP Sarkar is likely to drive home the message that 'everything' will be done agli bar!! As per the Economic Survey, there is going to be major slippage on the fiscal consolidation front. The Revenue receipt has come down to 8.9% of the GDP, and the gross tax receipt is barely 10% of the GDP - a good come down from the peak of 10.9% in 2009-10. Given the not-so-optimistic outlook for speedy recovery of the global economy, Indian economy can also not recover well in isolation to the global economic conditions. The fact that the manufacturing sector has suffered serious setbacks in the past few fiscals on account of either the policy paralysis or corruption or financial crunch resulting in a halt for investments or withdrawal of foreign funds, it is unlikely to recover in a big way, at least this fiscal. In this background, Mr Jaitley cannot really be 'cruel' enough to cast major burden on the indirect tax kitty. If one goes by the declining share of indirect tax with respect to the GDP - 4.4% (although it is good news from the perspective of maturity of our fiscal system which should lean more on direct taxes for augmenting the Tax:GDP ratio) but such a state of affairs is incidentally not by design. It only mirrors the continuous slide in the health of the manufacturing sector. As soon as the industrial production is back on the rail, more tax burden may be put on Central Excise and now, service tax too.

Ideally, a forward-looking welfare-oriented Government should be sagacious enough not to use indirect tax tools too often to raise revenue as the burden of incidence of such taxes is generally uniform for all the segments of the society, and the poor or lower-middle class 'suffocates' the most. Since indirect taxes like Central Excise and Service Tax do not discriminate between a rich or a poor when it comes to either buying goods or availing services, they hurt the underprivileged most. So, the diktat of the pragmatism resorted to by any government is to lean more on direct taxes for revenue and keep indirect taxes within reign of reasonableness. But what happens in practice in India is that most Governments and even taxpayers demand either exemption or reduction in direct tax rates. Every sector of the economy looks for direct tax sops to shore up their bottom line. Although most economists and politicians are aware of the bottom of the issue but none cares for correction of such perennial aberrations in our system.

Anyway, what may appear significant if one reads between the lines of the Economic Survey is the half-veiled roadmap for the GST. Let's try to fathom the finer aspects of this expression of the Survey - "... The implementation of a Central GST (CenGST) could be the first step towards the GST. Once the CenGST is implemented, and the information technology system for CenGST has worked, estimation risk will be lower and it will be easier for the centre and states to move to the GST." These lines lost in the ocean of details provided by the Survey clearly indicate a new line of thought in the Ministry of Finance. The moot question is - why should the North Block talk about the Doctrine of 'Ekla Cholo re'! Such a roadmap becomes more relevant in the background of the fact that only a couple of days back the Finance Minister had a closed-door interaction with the State Finance Ministers on the GST issue. Although he talked about only the CST compensation issue after the meeting but it seems more transpired between both the parties than the one that meets our eyes! The 'Going Alone' approach may be interpreted as the COLLAPSE of the DIALOGUE with the States. Is it that the States have, without mincing words, told the Finance Minister that the GST in the present avatar is not acceptable and they cannot afford to lose their fiscal autonomy? One of the key stumbling blocks for the Centre has always been the glaring and unmistakable reluctance of the States to lose their fiscal powers to impose tax. Most large States are still in their colonial mindset that if they forfeit their fiscal autonomy they would completely become subservient to the Union.

In this backdrop, it would be too rude to expect any concrete statement on the issue of GST from Mr Jaitley. It appears that to test the waters, the Economic Survey has quietly referred to only the Central GST (CGST) as the FIRST STEP towards the full-fledged GST. Since none in the business of governance can claim the exact 'face' and configuration of the full-fledged GST today, the North Block has taken the extreme step of going alone with the CGST. Such a step was suggested by many Revenue Experts and also TIOL in the past but the UPA Government was absurdly sanguine about bringing every faction of the States on board. But it was the BJP-ruled States which had opposed it, and this time when the BJP has changed the court, there are many others who appear to be standing in the queue of opposition. Thus, the Economic Survey talks about the information technology system i.e GST Network which has moved many steps forward as a Special Purpose Vehicle. But it has also been facing many teething legal issues and inter-service rivalry with the IAS, demonstrating rude keenness to capture the turf which naturally belongs to the IRS. It is learnt that when the CBEC recently raised the point of breach of privacy if it parts with the taxpayers' data for the GSTN, the IAS lobby got the same cleared by the Ministry of Law. In other words, the GSTN will go ahead with the data of Central Excise and Service Tax assessees and the North Block may prefer going alone by merging the Central Taxes first and then entice the States to join the smoothly-running 'GST wagon' in future. So, one may expect some surprises from Mr Jaitley on the issue of GST today.

Yet another subject on which one may expect some sort of roadmap from Mr Jaitley today is the Foreign Direct Investment (FDI). Going by the substantive emphasis being put on FDI by the Government it appears to me that such an emphasis has been borrowed from Mr P Chidambaram who also saw a panacea for all the ills of the Indian economy in FDI. If we go by the tone and tenor of the Rail Budget, the twin areas which may receive pronounced emphasis are the FDI and the use of communication and information technology tools in modern governance. Although FDI may be a pariah for many but it is certainly useful for quick revival of the economy. There cannot be two views on the desirable impact of FDI on a capital-starved economy like ours but too much dependence is also not advisable. Let's welcome it as long as it comes our way but our entire policy matrix should not be geared up only for FDI. No government should forget that the first word in FDI stands for 'foreign'. And anything that is 'foreign' cannot have an element of permanence in our economy. Thus, the focus of our governance should be on unearthing our own concealed resources locked in the parallel economy and creating enabling opportunities for the domestic industry to quickly heal their bruises and carry the economy back on the rail. It would be more desirable to give greater incentives to domestic industry which can alone create employment for the youth-cart which Mr Modi has successfully utilised to reach Raisina Hills, and encourage them to make more investments in critical areas of the economy. If we are able to take care of all the wheels of growth, we may not need to lean too much on FDI. If an insight is taken from the FDI inflows in the country so far, India has seen too much of outflows of capital in the form of royalties and dividends. Secondly, it has also been seen in the past that our FDI comes largely in form of FIIs investments in the stock market and are taken out of our pool at will, without caring for the mayhem it causes to the sentiments in the economy. There is nothing wrong about it as this is the universal character of FDI but what is wrong is our lopsided policy to create a bias in favour of FDI.

In this backdrop, TIOL expects nothing radical from Mr Jaitley who is likely to demonstrate his bias for FDI and foreign investors. And to exhibit his bias he is likely to undo the retrospective amendment in Section 9 of the Income Tax Act which has come under not only overseas but even internal attacks from various quarters. Although retrospectivity is generally believed to be unfair and bad but in tax laws, such an option is commonly kept by governments across the world. Anyway, it is likely that to shore up the sentiments of foreign investors who have brought down the sensex two days back for no rhyme or reasons on the Rail Budget Day, Mr Jaitley is likely to do what is needed to trigger a vertical ride for the sensex today.

Let's hope besides pleasing certain quarters of the economy Mr Jaitley also comes out with a clear fiscal roadmap for the entire tenure of his government if his Government really believes in the stability aspect of taxation. Besides stability, TIOL also expects him to come up with certain policy measures to dechoke the judiciary with mountains of tax appeals pending and also get a good chunk of revenue unlocked so that a part of revenue deficit could be bridged. KVSS-II can be a good option. TIOL wishes him good luck for his maiden efforts which may become the foundation for at least a five-year run for the policies of Modi Sarkar!