If top broking houses are re-rating India—Citi has upped its Sensex target to 19,900 by June 2013 and Morgan Stanley to 23,069 by December 2013—it’s because they sense reform is finally in the air. Whether it’s because the government has been forced to act for fear of India being downgraded to junk or whether the Congress party has got frightened by the results of internal polls done for it, the fact is the government looks a lot more purposeful. The diesel hike and the LPG cap, it is true, just cut the under-recovery bill by 10%, but there’s promise of a lot more—indeed, after RBI refused to cut repo rates, the finance minister promised a slew of reforms by the time of the next policy on October 30. While the Parthasarathi Shome committee has already recommended GAAR be pushed back by three years during which the taxman retool himself, FE reports Shome is likely to suggest something equally dramatic on his other report which deals with Vodafone-type transactions—namely, overseas sales where the underlying asset is in India. According to the FE report, Shome is likely to say that while India can tax sales where the underlying asset is in India, this can only be prospective. If that happens, that will dramatically change the way investors look at India. Taxing companies is one thing, sandbagging them from behind is quite another—precisely the point made by Chief Justice Kapadia when he ruled against the taxman in the matter and in favour of Vodafone (the retrospective taxation amendment was brought in the budget as a means to nullify the Supreme Court ruling).
Perhaps the next thing the FM needs to focus on is cleaning up the entire tax administration. Income tax disputes, and we’re not just talking Vodafone, have doubled to R4.37 lakh crore in the year ending December 2011. And with tax exemptions amounting to 59% of total tax collections, it’s obvious this is also blunting the taxman’s collection abilities. After all, if the taxman goes after firms paying less than the average 24% tax rate—19.3% for diamond-cutting firms, for instance—this could well be because these firms are allowed tax exemptions by law. The other tax area the FM needs to focus on is to get GST activated. The three sticking points here—GST compensation, a GST council headed by the FM and a GST appellate tribunal—are all easily settled. While the Centre should agree to compensation, there is little doubt states are exaggerating the Central Sales Tax they collect, but there is enough official data to sift the fact from the fiction. A GST council headed by the FM to settle disputes may be the perfect solution, but if the current empowered committee of state finance ministers can do the job almost as well, why rub states the wrong way? Ditto for the appellate tribunal to settle disputes. In a federal system, the last two can be brought in if the states agree—there’s little point jeopardising GST waiting for the perfect system.