#dnaEdit: Toxic taxes

One of the most awaited acts of the new BJP-led NDA government is what finance minister Arun Jaitley will unveil in his maiden budget next month. Meanwhile, there are enough direct and indirect signals from the government that it wants the tax regime to be transparent, fair and that retrospective taxes are bad in principle as well as reprehensible. The reference to retrospective tax is, of course, to the announcement made in his 2012-13 Union budget by then finance minister Pranab Mukherjee, which amended the Income Tax Act to collect a tax of Rs11,000 crore on the Vodafone-Whampoa deal. It should not be forgotten that Mukherjee’s decision was both resented and opposed by his UPA colleagues, including his successor at the finance ministry, P Chidambaram, and even former Prime Minister Manmohan Singh. There was a flutter in the business circles that it sent out a wrong message to foreign direct investors in India. The previous government was also in the process of undoing what it thought was an imprudent move in time of economic crisis. The Vodafone issue of course is a complicated one, but political critics, including those from the BJP, were not going to waste time on the merits of the case. So, the Shome Committee mouthed the platitude that retrospective taxes are bad in principle.

The Modi government’s thoughts on the tax regime are not radically different from those of the Manmohan Singh one — rationalisation of tax structures, introduction of the Direct Tax Code and the General Services Tax (GST). These thoughts and measures have been on the anvil for more than a decade now, and they will have to be brought in sooner than later. In his pre-Budget meetings with the industry, Jaitley has been told, as other finance ministers before him have been, of the tax woes of India’s captains of business and industry. Some of the complaints are quite valid, but they do not in any way undermine the basic principle that taxes, as such, are not punitive. The government needs to tax economic transactions in order to fulfil its obligations of maintaining not just law and order but also a market regulatory mechanism. There is the obligation to deliver on the basic needs, including shelter, food, health and education of the vulnerable sections even if one does not believe in a welfare state. There is, then, enough rationality in principle behind all taxation.

Retrospective taxes are not good but it does not really settle the issue in favour of Vodafone. There are reasonable taxes and not all of them amount to tax terrorism. The economic philosophy of the BJP, the dominant player in this NDA government, is not clear. It does not fully believe in a laissez faire economy and no responsible political party in a developing economy can do so. Whatever may be the right-wing economic thinking of the BJP, it cannot hope to declare a permanent tax holiday which is dream expectation of the private sector. Government and Jaitley have a tough job on hand because the turbulence in the economy is due to factors arising from the situation in places like Ukraine and Iraq and in factors like El Nino. The NDA can blame UPAII for the present-day economic woes, but the blame game cannot last after the first year. BJP will have to come to grips with the issues on its own and find its own way of dealing with them.