Jaitley hints at tax regime of global standards

Says high cost of capital has slowed manufacturing

As the Union finance ministry begins preparing the Budget for 2015-16, Finance Minister Arun Jaitley on Monday hinted at putting in place a globally compatible tax regime to revive the manufacturing sector.

He also nudged the Reserve Bank of India (RBI) to cut the policy rate. The high cost of capital, he said, was the most important factor in the slowing of manufacturing growth in the recent past.  

Jaitley indicated the easing of entry norms for manufacturing as an idea being mulled. He said there had to be a shared vision between the Centre and states, political parties, regulators and allied institutions to put India back on a growth track.

“Our regime has to be competitive. People purchase goods; they don’t like to purchase taxes along. Unless our taxation regime is internationally compatible, the cost of our products is going to be more. Competition is going to be international. Am I going to provide them a tax  regime which is compatible to what they get across  the world?” he said in an inaugural address at a meeting on the government’s Make in India initiative.

The workshop had discussions with Cabinet ministers, secretaries, industry representatives of 25 identified sectors of the Make in India campaign, state representatives to  provide feedback on areas of concern and the way ahead.

Tax regime
Jaitley recalled his first Budget had introduced advance ruling mechanisms (on taxation) for domestic investors as well.

“Even before they (investors) spend the first rupee or the first dollar, they are conscious of the fact as to what the tax administration is and what  the tax liability is in India,” he said.

He rapped the predecessor government for retrospective tax amendments which became “a defining moment against India globally.” Uncertainty over the tax administration had scared investors away. “Has it not resulted in a closedown of plants which were comparable to global competitors?”

It may be recalled that Vodafone is embroiled in a tax dispute with the government after the latter amended the Income Tax Act with retrospective effect. Nokia shut its factory near Chennai last month over tax issues. Jaitley said entry points into the manufacturing sector had to be eased. “Our initial barriers have to be lowered and perhaps even removed. If we keep the doors closed, investments won’t come in.”

He promised more reforms to bring an upturn in the sector, saying only radical steps could do so. He indicated more of changes in labour laws and in the power sector. And, emphasised the need to have a skilled workforce among youth.

Signals for RBI
He identified cost of capital as a single factor which had slowed manufacturing. Though he did not directly name RBI, it is a fact that the central bank has consistently refused the finance ministry’s expressed desire to a lower policy rate.

He said there was a need to ensure liquidity in the markets. “We need to ensure capital is available, we need to ensure that for those sectors which are starving, we are in a position to provide adequate capital.”

He said the success of the scheduled meet of bankers with Prime Minister Narendra Modi later this week and the Make In India campaign would give a fillip to manufacturing.

Investor issues
On the ease of doing business, Jaitley asked, “What is it that has happened in the past few years that added to the complication of doing business (in India)?” He said project implementation “across ministries, across states, across regulatory mechanisms requires to be expedited”. Calling for a shared national vision to boost growth, Jaitley said: “It is not merely between political parties. It is not merely between Centre and state governments. It it is also between various other institutions, which have become altars of governance.”

He regretted that “judicial institutions, besides administering justice, in some areas have also become an organ of governance itself”. Jaitley said India’s economic growth would be “much better” in 2015-16. “The past two years witnessed an economic slowdown. This year might be somewhat better, and next year will be much better.”

The government expects growth in gross domestic product to be 5.5 per cent in 2014-15, up from 4.7 per cent the year before.