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Minhaz Merchant

Minhaz Merchant is the biographer of Rajiv Gandhi and Aditya Birla and author of The New Clash of Civilizations (Rupa, 2014). He is founder of Sterling Newspapers Pvt. Ltd. which was acquired by the Indian Express group

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End Rollback Governance

While Modi emphasizes the importance of removing roadblocks in the economy, bureaucrats continue to stymie progress. Angel Tax on investments by venture capital firms in startups was an idea thought up in the dark recesses of the Central Board of Direct Taxes (CBDT) ...

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Policy rollbacks are the hallmark of poor governance. In the 2019-20 Union Budget, Finance Minister Nirmala Sitharaman shocked the stock market by imposing a “super-rich” tax. Foreign Portfolio Investors (FPIs) structured as trusts would be liable to pay this tax too.
 
The market promptly tanked by nearly 10 per cent – its sharpest weekly fall in years. Ironically, the value of the government’s own shareholding in listed public sector units (PSUs) also plummetted, just as the government was preparing to finally begin privatising several big PSUs to raise up to Rs 3 lakh crore. 

Realising its folly – the additional tax mop-up from the super-rich tax would at most be a miniscule Rs 5,000 crore while damaging foreign investment inflows that could cost the economy far more significantly – the government began to have second thoughts. The Finance Ministry is now tying itself into knots to add an amendment in the Union Budget that would ring-fence FPIs from the super-rich tax. 

Rollbacks are not new in India. Most Budgets presented by governments across the aisle have announced irrational taxes or policies. They have been forced by public opinion and industry associations to roll back several such policies.  

The rollbacks aren’t confined to financial policy. An off-Budget announcement a few months ago removed the tax exemption in certain cases of disability pensions to armed forces personnel. Faced with near-universal anger, Defence Minister Rajnath Singh has sensibly decided to roll back the policy that hits armed forces officers and jawans disabled in war or during security operations. It took a concerted campaign by armed forces veterans to overturn the policy.

Yet another rollback has rescinded the announcement to provide for a three-year jail term for company directors not adhering to a mandatory two per cent expenditure on corporate social responsibility (CSR). Sitharaman says the jail term provision will not be “operationalised” – raising the question why it was put in place to begin with.

Education Minister Ramesh Pokhriyal “Nishank” meanwhile told an IIT Bombay audience to reduce the focus on English. Faced with mounting criticism, Pokhriyal recanted. In an interview with the Hindustan Times, he said: “English, being an international language, has many advantages. We are not at all opposing English. English should also be learnt and studied. In fact, we should learn all global languages.”

The Goods and Services Tax (GST) is a living, throbbing example of how rollbacks expose the irrational nature of original formulations. For example, while the multiplicity of tax slabs has been gradually cut, we are far away from an ideal GST where there is one simplified rate (say, 18 per cent) across all sectors except food and other essentials which should have zero tax.

The socialistic mindset of imposing a “sin” tax rate of 28 per cent on alcohol and luxury cars needs to change. Socialism gave India a GDP growth rate of  less than three per cent a year for nearly 40 years under Prime Ministers Jawaharlal Nehru and Indira Gandhi. It took bankruptcy of the Indian treasury in 1991 and the International Monetary Fund’s insistence on economic liberalisation to free the economy from its socialist straitjacket. Under Prime Minister Narasimha Rao and Finance Minister Dr Manmohan Singh, GDP growth rates doubled as free market economics attracted new investment from domestic and foreign companies.

Apart from eliminating the rollback culture and an atavistic socialist mindset, the government must get economic governance right. Prime Minister Narendra Modi in an interview with The Economic Times showed that he was aware of the problem. But does he have antidotes for ministries where calcified bureaucrats set policy? This is what Modi said in his interview about what is widely acknowledged as an underwhelming 2019-20 Union Budget: “The Budget is neither the beginning nor the end of our work in economic policy. My team and I are thinking about these issues all the time and acting on them. The Budget announced Rs 70,000 crore capital in public sector banks to boost credit growth in the economy. Ideas such as asset monetisation, asset recycling and a continued focus on strategic disinvestment are aimed at raising funds for public capital expenditure. These measures will boost growth and crowd-in private investment soon. The issue is not merely about lowering of policy rates by the monetary policy committee, but also about the cost of availability of credit. We are working closely with the Reserve Bank and the banking system to remove blockages in the flow of credit, especially to small and medium enterprises. We are also looking to remove all delays in government payments and tax refunds so that cash flow in the economy revives.”  

While Modi emphasises the importance of removing roadblocks in the economy, bureaucrats continue to stymie progress. Angel Tax on investments by venture capital firms in startups was an idea thought up in the dark recesses of the Central Board of Direct Taxes (CBDT). It took months of protests by entrepreneurs to have the tax rolled back.

The biggest rollback of all could be the proposal to use the “escape clause” of 0.5 per cent in the Fiscal Responsibility and Budget Management (FRBM) Act. If that move is approved by the Prime Minister’s Office (PMO), the government will have an extra 0.5 per cent of GDP or Rs 1.05 lakh crore to spend on a fiscal stimulus. The fiscal deficit will be allowed to slip to 3.9 per cent of GDP.  

The real rollback – and one that is overdue – should be in the functioning of the tax department. Beset by complaints of  harassment by tax authorities after the suicide of Café Coffee Day founder V. G. Siddhartha, the CBDT has pledged to weed out officers who engage in extortionate demands. In his interview to The Economic Times, Modi affirmed that action was imminent: “It is a fact that some black sheep in the tax administration may have misused their powers and harassed taxpayers, either by targeting honest assessees or by taking excessive action for minor or procedural violations. We have recently taken the bold step of compulsorily retiring a significant number of tax officials and we will not tolerate this type of behavior.” That rollback will be widely welcomed. 


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