Published Editorial

Panel Discussion on the Union Budget 2013-14 expectations

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CK: Mr Damodaran, would you like to say something about the situation?

There is excessive dependence on foreign institutional investment: M. Damodaran; Compliance has gone down. An aggressive tax administration is scaring foreign investors: Satya Poddar
M. Damodaran: Austerity sends a message, but it is not the complete package. By doing a little less of the same, you cannot get a solution that is sustainable and can serve you in the long run. I believe that somebody should take time off from the here and now, and look at the Budget in
detail and see what needs to survive.

I also believe the huge positive we have is that there is a recognition and understanding of the nature and dimensions of the problem. What you need is putting in structural solutions, and they will emerge only from zero-based Budgeting.

Two-three points I think are important. One, I think there is excessive dependence now on foreign institutional investment, especially through participatory notes, and to my mind, in the long term, this can be hugely destabilising. It is all right in the short term, you find that flow of money has dried up and you are agnostic about the instruments through which the money comes in. That is not a long-term solution. We need to ensure that the Indian contribution to the Indian growth story is more than what it is at this point of time.

In India, we find increasingly a practice which is called nothing succeeds like a successor, the predecessor is necessarily wrong.

CK: We did some analysis and it showed that in the last nine years this government has been constantly reversing direction, you do something and then you undo it.

Damodaran: In fact, if you talk to people within and outside the country they will tell you, make whatever provisions you want to, but do two things: let those provisions stay unchanged for a while, so that we get used to it and we can plan our businesses and our life on that basis. Number two, state it simply, we do not want too many ifs and buts, which then makes it paradise for lawyers. Make laws a little simpler.

These are the two things people are asking for. Some continuity, some certainty, some clarity on what the provisions are.

CK: So, Mr Poddar, taxation is being frequently referred to. I am very interested to know what you have to say.

Satya Poddar: On the taxation side, the government has been trying to mobilise additional tax revenues. As a result rather than mobilising additional revenues, the tax system has become less productive than before. Compliance has gone down. A very aggressive tax administration is scaring foreign investors. There are increasing volumes of disputes in the courts on issues which should not have been debated at all. In countries like Britain, Japan, there are no more than one or two court cases of transfer pricing. In India there are 4,000 transfer pricing cases each year and none of them gets resolved and then the government of India says or the ministry of finance says that we have Rs 40,000 crore in demand of transfer pricing cases which is a method of bringing back illegal money. Now transfer pricing and illegal money have absolutely nothing in common. Transfer pricing is nothing but a division of a declared income between two governments.

Now take the example of GST, (goods and services tax) in 2006/07 they announced they will have GST in five years. For the first four years nothing was done, no serious study, no task force was created and the issues were discussed at very casual meetings more like a tea party.

Number one on the GST front, they need to go back to the basics. The constitutional amendment Bill that was tabled was clearly flawed. The government was not serious about implementing it and there was no consensus on it. Now they have reached a compromise. In my view, compromise is still the second best. The government should still take some time to see if they can get a better model.

My own feeling is that the Centre has given up. Mr Chidambaram's view is let me get GST, no matter how good or bad.

Now you talk about taxation of the rich. My own view is who are the rich that you are trying to tax, and I divide the rich into three packets: the working rich, the investor rich and the invisible rich. Working rich are basically the employees who do work. All of their income is fully reported and is fully taxable and they are the ones who are in the universe of tax returns filed. I have a feeling that 80 to 90 per cent of the so-called rich, say, more than Rs 50 lakh to Rs 1 crore of income, are really the employees who have done well through their efforts and are getting good salaries.

Then you have the investor rich. The investor rich are essentially those who have done well, but they get their income predominantly from capital gains and dividends and maybe interest. And those incomes by law are not taxable. Capital gains are all exempt on listed securities. Dividends are not taxable at the personal level, they are only taxable at the corporate level and even interest income - if they have tax-free bonds or other instruments - even that is not taxable. So those incomes perhaps are declared because they are not taxable in any case. Now that's where you have no tax. Now when you say the rich should pay more tax, I say by all means, but then define the rich to include all the three categories. If you simply increase the tax rates in the name of rich paying more tax you are basically going to increase more burden on the employee class which is already a very significant contributor to the tax system.

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