Chidambaram strikes right notes, transfers key officials
Finance minister P Chidambaram struck all the right notes at his first post-return press conference when he spoke of, among others, the need for clarity in tax laws, a non-adversarial tax administration. Apart from the two committees already set up to review GAAR and IT-taxation, the FM spoke of a review of the retrospective taxation and hinted at some relief for Vodafone and others that fell in the same category. Part of the sharp fall in investor sentiment, there is little doubt, has to do with the adversarial attitude of the tax department—it’s not just Vodafone, FE reported some months ago, the amount of income tax dues under dispute has risen from R2,43,603 crore in December 2010 to R4,36,741 crore in December 2011. Though a lot of the promises made by Chidambaram are in the future, he made a start on Sunday when he swapped revenue secretary RS Gujral with expenditure secretary Sumit Bose—Gujral has been associated with all the taxman’s high-handedness in the last budget. Though Chidambaram didn’t mention it, it is important for him to revive the momentum on the Direct Tax Code since the high proportion of tax exemptions—6% of GDP today, or around 60% of total FY12 direct and indirect collections—are a source of corruption, apart from reducing tax efficiency. While the DTC sought to do away with most exemptions, this was watered down, so much so that with most exemptions remaining, DTC has lost most of its original purpose. India Inc didn’t like the minimum 2% tax on net worth the DTC suggested, but while this could be negotiated, there was a sound economic rationale to it.
Many of the promises made by Chidambaram, such as removing supply-side constraints for food inflation, don’t quite fall under his remit, so presumably he was speaking for the government as a whole. So, while the statement on how everyone would have to share the burden of fiscal consolidation sounded like a diesel hike was in the offing, this is a political call that goes beyond the FM. A committee will make some recommendations on fixing the fisc but what’s required is quite simple: in the case of diesel, while per capita incomes have doubled in the last 5 years, diesel prices have gone up by just a third. Similarly, the investor-unfriendly attitude of the government isn’t restricted to just the taxman. Whether the new FM can convince RBI to lower rates remains to be seen, but he made the right point when he spoke of the need to take “carefully calibrated risks in order to stimulate investment.” What is within the FM’s remit, and he promised action on this in a few weeks, is to announce decisions to attract investors into mutual funds etc. While this means fine-tuning the incentive structure, the FM would do well to find ways to end the oppressive monopoly the EPFO has on compulsory savings—fine-tuning CRA fees (http://goo.gl/DFbje) is critical in this context. Rome wasn’t built in a day, and no one expects the government to move on everything, but a few critical moves will go a long way in reviving investor confidence.