If the new government is looking for a way to effectively raise trust in the Indian state among investors and corporations, an obvious way would be to declare that it is overhauling tax administration. It should also address the proliferation of first information reports (FIRs), and of administrative intrusions of various kinds into the normal course of doing business. More than one leader of the private sector has underlined this in their response to the electoral verdict in favour of the Bharatiya Janata Party. And, certainly, it is an essential part of the modernisation of India's economy, as well as an important step towards reviving investment and the India growth story.
The last years of the United Progressive Alliance government were shaped by a relationship with the private sector that had turned adversarial. One major reason was taxation. There is no doubt that various companies were taking advantage of complex tax laws that were not yet capable of dealing with financial liberalisation. Even so, there is little doubt that some of the transfer pricing-related demands were excessive. If they were not, then their justification was definitely opaque and arbitrary. Regular entrepreneurs found themselves forced to explain the ultimate sources of all their investments, even those from well-known offshore private equity funds. Several demands for taxes were levied that executives and investors suspected were merely attempts to raise revenue temporarily in order to meet short-term targets. This is because if anyone wants to contest a tax demand, or take it to arbitration, the rules specify that you have to deposit 10 per cent of the demand anyway.
Thus, arbitrary and unjustifiable demands had become a method of revenue mobilisation for tax officials facing ever stricter demands from a finance ministry worried about the fiscal deficit. Meanwhile, appeals in tax cases continued to be practically automatic in spite of promises from various law ministers that this would no longer be the case. And, as an investigation in this newspaper on Monday showed, the Central Bureau of Investigation (CBI) has taken to registering ever larger numbers of preliminary enquiries that do not fructify into official charges or even FIRs. The preliminary enquiries effectively tarnish reputations, even when no evidence on which a legal case can be built is discovered.
The new government can and must see this all as administrative overstepping by a weak regime lashing out in all directions. The incoming prime minister, Narendra Modi, has often used the phrase "minimum government, maximum governance" on the campaign trail. The most important way in which he can implement this maxim is to clean up the degree to which the state harasses the private sector - and tax and CBI investigations are the biggest part of that. Enforcement agencies, such as the tax offices, the Enforcement Directorate or the CBI, should be made accountable for their errors. Currently accountability runs only one way - officers are hauled up for missing out on possible cases. It should run both ways - they should also be hauled up for, say, agreeing to a judicial appeal that eventually goes nowhere. That is one way to improve relations between the government and the private sector.