Time to abolish service tax and ensure prosperity

Time to abolish service tax and ensure prosperity

By M.D. Nalapat | 24 January, 2015
Those who expected the first Modi budget to reflect naya soch are now being hopeful that the next set of budget proposals will reflect the change.

When last checked, service tax accounted for a total collection of Rs 17,500 cr to the national exchequer, or what is being saved in less than two weeks because of the continuing fall in crude oil prices. To collect this relatively small amount, an army of 6,000 has been put to work, using the threat of prison, besides other bludgeons to force an army of professionals to pay what is essentially a surcharge on income beyond the usual taxes. Palaniappan Chidambaram should have gilded statues of his erected in each country whose companies compete with Indian corporates, for his stewardship of the Ministry of Finance resulted in a domestic reversal of mood, from optimism to despair.

Along with his close friend Kapil Sibal, the former Finance Minister was responsible for the criminalisation of a wide range of actions, few of which would have attracted even a small fine in any democracy having a civilised system of governance. Apart from such mindlessly sadistic measures as a levy on ATM withdrawals "to identify black money" or his taxing "fringe benefits" and thereby ensuring a disincentive to corporates to undertake productive activity, Chidambaram sharply widened the scope of service tax while instituting numerous penal provisions, exactly as he and Sibal had done in the case of many other sectors.

The government would be able, through disinvestment, to mop up a sum much bigger than the Rs 17,500 cr foregone by the abolition of a tax.

After 10 years of the Prime Ministership of Manmohan Singh, the individual who in his previous avatar was hailed as the "father of liberalisation" in India, this country remains a democracy only in a very attenuated sense, for it is now unbelievably easy for the state to send an individual to prison. It helps that more than a few jurists regard prison as the first option for an offence, as witness reports of the black money SIT calling for mass jailings of those accused — and the word "accused" is repeated — of evading income tax. The distinguished former Supreme Court judges who head the SIT are perhaps unaware that in a country blighted by a colonial legal and administrative system, the income of a taxpayer is in effect what the income-tax officer declares it to be. Check the assessments of so many high net worth individuals, and how they shrink substantially after appeal to a tribunal (or after a few boxes of Swiss chocolates or Indian halwa are given to the ITO). Should Prime Minister Narendra Modi and Arun Jaitley, his closest associate within government (the other, Amit Shah, is BJP president) rely on the bureaucracy to come up with innovative ideas for the next Union Budget, that document is likely to be as big a disappointment as the first Modi budget. The reason is that officials look only to ways of increasing the percentage share of the exchequer in the "cake", forgetting that a lower proportion of a growing cake yields more — often much more — than a big proportion of a shrinking cake.

Thanks to its colonial traditions, the Ministry of Finance concerns itself primarily with squeezing out revenue from whichever source is at hand, rather than in ensuring that double digit growth follows as a consequence of its policies.

Those who expected the first Modi budget to reflect naya soch, but were disappointed, are nevertheless hopeful that the next set of budget proposals will reflect the comprehensive change in governance, which Candidate Modi promised the electorate that he would ensure. For that to happen, the focus needs to move away from a mechanistic grubbing for revenue to the formulation of proposals which would fire up the animal spirits of economic players and thereby generate double digit growth. Equally, North Block needs to focus on improving conditions for India's Main Street rather than New York's Wall Street, which is the focus of attention of the current leadership of the Reserve Bank of India.

Abolishing service tax would boost asset values by a large multiple of the sum lost as a consequence of this measure. The government would be able, through disinvestment, to mop up a sum much bigger than the Rs 17,500 cr foregone by the abolition of a tax, which has become a nightmare for hundreds of thousands of small businesspersons and professionals, many of whom voted for the BJP nine months ago. Add to the mix a reduction of income tax and a moving away from the present fetish about the Current Account Deficit towards high growth, and the economy will take off in the manner then regarded by voters as inevitable once Narendra Modi took charge of the Government of India.

 

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