TIOL - COB(WEB) - 172
JANUARY 28, 2010

INDIA's fiscal deficit has leapfrogged to near 8%, and the budget makers are genuinely worried over the flip side of the swelling deficit figures. Some of the key budget makers are learnt to have advised the Finance Minister to commence the inevitable process of phasing out of the Economic Stimulus Packages announced last fiscal. True, some of them do feel that the process of recovery is only half-way, and any attempt to jack up the central excise duty or service tax rate may prove to be premature and destabilising for the economy. So far as this Column is concerned, the half-recovery school of thought is certainly more realistic and practical. There are many sectors apart from the manufacturing which continue to show unmistakable signs of vulnerability to the vagaries of market conditions. It is certainly not the right time to go for a policy which may promise the short-term capital gains in terms of buoyancy in the revenue collections but may countervail the pace of the accelerating economic growth recovery cycle. Going by the prognosis of economists worldwide, the full recovery may be possible by 2010-end.

In this backdrop what are the options available to the Finance Minister who is predictably under pressure to contain the soaring fiscal deficit and also to allocate greater resources for welfare and development sectors in the coming budget. The two options which TIOL thinks, available to the FM are,

1) to selectively hike the Central Excise duty on only those sectors which have shown the robust growth rate like the automobile and partially hike the service tax rate across the board; and

2) to work on a two-fold tax amnesty scheme - a) Offshore Fund Disclosure Scheme, and b) Domestic Disclosure Scheme.

True, such amnesty schemes are worldwide perceived as an incentivised scheme for tax dodgers. Such schemes also invite disturbing criticism from the political Opposition in any economy. Votaries of ethics in tax governance may also voice strong opposition to such a scheme. But the ground realities are such that no economy functions without its flip side - the parallel economy. It is an evil the Treasury in every country has to learn to live with. However, when an opportune time comes, the Treasury should not miss it in the name of ethics and should assail it, strategically, to extract a few pounds of flesh to buttress the capital requirements of the economy.

The global economy was never so acutely starved of funds. A large number of financial skyscrapers have collapsed like a pack of cards in the past two years. For revival of the economy, every country needs an extra bout of capital. The traditional source for extra ounce of funds has been the fiscal instrument in the hands of the elected government. But the current crisis does not give such an option to any government across the world. Then, what is the alternate source?

The national wealth parked in tax havens is certainly a legitimate source for all economies, in need of funds. If we look at the series of high-profile G-20 meetings last year, and the consequential measures to crackdown on non-compliant tax havens, it lends legitimacy to all such schemes which may be designed to bring back offshore funds home. Italy has done it successfully and garnered as much as 95 billion euro. So encouraged, felt the Italian Government that it has extended the scheme from December 15 to March 31, 2010, and hopes to mop up another 30 bn euro. The HMRC in the UK has also come out with a similar scheme.

If we look at all these tax amnesty schemes one may find that on the one hand, the G-20 has built up the pressure on tax havens to comply with the OECD-framed internationally agreed tax standards and, on the other hand, the developed economies have offered the tax dodgers a leeway to shell out certain percentage of their unaccounted offshore funds and get away with the same. Thankfully, a large number of major tax havens have complied with the OECD standards, and their banks have become more cooperative and transparent in sharing vital information about their account holders (See chart of tax compliant tax havens).

IMPLEMENTING INTERNATIONALLY AGREED TAX STANDARDS Progress made as at 11th January 2010 British Virgin Islands Isle of Man Cayman Islands Cyprus Jersey Monaco Mauritius San Marino Liechtenstein Netherlands

2010 happens to be the right year for India as well, to make hay while the sun has been shining across the world. The Ministry of Finance has collected certain data from the German revenue authorities revealing names of Indians having bank accounts in Liechtenstein. The Swiss Government has also relaxed its banking secrecy laws. Going by the various studies available in the public domain, as much as USD one trillion has been parked by Indians in various tax havens. True, such an astronomical figure is disputed but let's presume that even half of such guesstimated figure is true, Mr Pranab Mukherjee may think of mopping up a part of the offshore funds by announcing a simple and innovative tax amnesty scheme for the fiscal 2010-11.

It is indeed the right time to announce an Offshore Disclosure Scheme with a simple rider like normal tax rate plus 10% penalty. No questions to be asked post-disclosure. This will be a golden chance for lakhs of Indians to clean their historic tax irregularities and help shore up the fund requirement of the government. Rather than criticising the tendency to illegally park funds in tax havens, India should try to bring a part of such funds back home so that it could perk up our growth cycle rather than helping out unknown economies. The Indian economy has appreciably opened up, and there has been huge FDI outflow in the recent years. A part of such outflow must have been parked in tax havens, awaiting an opportunity to travel back to India.

Similarly, there is no harm in offering another Domestic Disclosure Scheme to garner the much-needed revenue for the deficit-riding exchequer. The focus this time unlike the previous schemes, should be to make it simpler and not too penalising. It would first make a dent into the parallel economy and would help bridge the widening revenue deficit. More than that, such a scheme would help the Government in postponing harsh fiscal decisions which may arrest the recovery process half-way. Let's hope our policy makers and the Finance Minister could muster enough political courage to make a capital out of the present anti-tax haven global environment and do not miss the opportunity to get out of the sluggish growth cycle.