You are here: Home » Opinion » Editorial » Editorials
Business Standard

Towards fewer distortions

Instead of tweaks, need to simplify tax system

Business Standard Editorial Comment  |  New Delhi 

Much is expected from the Union Budget to be presented at the end of this month. Many hope that it will lay the foundation for second-generation reforms, and a sustainable push towards making it easier to do business in India - the price of success for the prime minister's "Make in India" campaign. There are some disquieting indicators, however. Recent newspaper reports have suggested that the government is seriously considering various tweaks to the tax system in order to achieve its policy ends - in spite of the fact that such tweaks are often anti-reform, backward-looking and have been shown by India's history to be overall counter-productive.

This newspaper reported on Monday, for example, that the minimum alternate tax, or MAT - which is meant to provide a floor for tax demands on companies, as an important component of a simple tax code - might be needlessly complicated. According to the report, a differential MAT structure might be introduced for regular companies, small and medium enterprises, and infrastructure companies. This would be yet another distortion in an administrative structure that already incentivises companies to stay small - the very opposite of what a genuine manufacturing revolution would require. Indirect taxes are also apparently being re-examined from the perspective of "Make in India"..

Read our full coverage on Union Budget

It is not just the internal tax system the government appears willing to tinker with. There are also reports that the tariff structure will be rejigged to enable greater competitiveness for Indian goods, particularly those from the electronics sector. Certainly, inverted tariff structures - where imported inputs are over-tariffed as compared with final products - need attention. But the answer is to lower tariffs across the board, so as to allow Indian manufacturers to slot themselves into global supply chains, and not to raise tariffs arbitrarily to protect their pricing power, in response to lobbying from industry. Such import substitution is always tempting, but India has had a long history of experimenting with such tariffs and, regardless of how virtuous the cause, the outcome has always been the same: less, not more, competitiveness. Greater arbitrariness over taxes helps nobody except bureaucrats and well-connected but uncompetitive firms. It does not help investors, consumers, or job-seekers - and it is these, surely, who are the new government's primary constituency.

The run-up to every Union Budget is accompanied by many demands from industry, and the government has to give them a patient hearing. But the time has passed for sector-specific concessions. If the Narendra Modi-led government is serious about making India a better and more transparent place to do business, it should refrain from making minor changes in the tax system to suit the narrow interests of certain sections of the economy. Instead, it would ensure that there are fewer distortions, fewer differential slabs and less arbitrariness. Reducing the scope for lobbying, evasion, rent-seeking and protectionism is precisely what India needs from second-generation reforms. If the Union Budget fails to move significantly in that direction - and worse, if it slides back towards pre-1991 thinking - then investors and genuine entrepreneurs will be sorely disappointed.

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

First Published: Thu, February 05 2015. 21:40 IST