The 2012-13 Budget cannot be said to have been greeted with great joy by anyone. If there is one exception to this rule, surely it is the Centre’s revenue officers. In its desperate attempt to scrape up enough tax revenue to plug the fiscal gap created by unbridled expenditure, the government has expanded the powers of discretion available to assessment officers in a manner that is both foolhardy and short-sighted. In doing so, it has lost sight of how taxes should in fact be reformed. Tax laws cannot be simultaneously complicated, rigidly and discretionarily applied, and administered by a corrupt system. The government has correctly moved to plug some loopholes in the tax system. Yet, unless accompanied by a decrease in discretion and wholesale reform of revenue administration, these moves will be self-defeating.
Investors, foreign and domestic, are concerned about the changes to tax law the Budget has introduced. There continues to be dangerous confusion about how the General Anti-Avoidance Rules (GAAR), for example, will be applied. The retrospective amendment to the Income Tax Act to clarify that transactions such as that between Hutchison and Vodafone are subject to capital gains tax has also come in for considerable flak. These changes are in keeping with best practices elsewhere. So why, then, the concern? Some of it may be by design — this is correctly seen as a government prone to rolling back decisions if the outcry is loud enough. But that is not the whole story. The answer is: regardless of whether or not such changes are justifiable, they feed into widespread fears that this government is turning to statism, and allowing discretion to its more unaccountable functionaries. It is true that India does not regulate transfer pricing, for example, properly. It is unarguable that this lack of modern legislation allows tax to be avoided by many companies, and has created corporate holding structures that are much more complex than the underlying economic realities require. Simplifying this is essential. More transparent structures can only strengthen India’s private sector. However, the government must ask if allowing the determination of real value underlying transactions to be made by its revenue officials is going to achieve its ends.
What, then, is the way forward? The answer is that, without administrative reform, any closing of loopholes will scare investors. Further, without administrative reform, the changes could well be ineffective. A sign of the lack of trust in the government’s willingness to impose accountability on its revenue officers is visible in that even the GAAR, which are bound about with restrictions on how and when they can be applied, are being attacked as reversing the burden of proof. The fear is simply this: if you allow a corrupt administration the power to force you to declare how you are not breaking the law, it will not just deter lawbreaking, but also deter those with no intention of breaking the law. The finance minister’s faith in his revenue officers is touching. Yet good institutional design should take into account the fact that they are, in fact, not worthy of such trust. The Budget’s move towards excessive discretion is dangerous, and must be reversed.
