Saturday, January 14, 2006

K. Narayanan, The Hindu's first Readers' Editor / On Resource Mobilization

K. Narayanan, The Hindu's first Readers' Editor
Aim is to institutionalise the practice of self-regulation, accountability &

CHENNAI: The Hindu has perhaps become the first newspaper in India to
appoint a Readers' Editor, who will be "the independent, full-time internal

Making the announcement at the conclusion of "two lectures" by the Editor
and the Readers' Editor of The Guardian, The Hindu 's Editor-in-Chief N. Ram
said: "The key objectives of this appointment are to institutionalise the
practice of self-regulation, accountability and transparency; to create a
new visible framework to improve the accuracy, verification, and standards
in the newspaper; and to strengthen bonds between the newspaper and its
millions of print platform and online readers."

Editor of The Guardian Alan Rusbridger spoke on the topic "Do newspapers
have a future?" while the newspaper's Readers' Editor Ian Mayes outlined his
role and the canvas of his interaction with the readers as "The news
ombudsman - a visible presence, an independent voice."


On Resource Mobilization

Resource mobilization, in any economy, entails taxing the rich.
Unfortunately, the experience of the past decade-an-a-half has shown that
successive Governments at the Centre have not only abdicated their
responsibility in this regard, but have handed out largesse to the affluent
sections year after year through tax-cuts of all varieties. Besides
contributing to rising inequalities, this has also resulted in a significant
fall in the tax-GDP ratio in India and constrained the ability of the
Government to undertake development expenditure. The UPA Government has to
muster the required political will in order to reverse such policies. Some
proposals for resource mobilization are suggested below.

1. Collect Tax Arrears: Income Tax arrears to the tune of nearly Rs.
99,000 crore and customs and excise arrears of another around Rs. 16,000
crore have piled up till 2005-06. Collection of central and excise arrears
had registered significant growth in 2004-05. Stepping up the momentum, the
Government should make a determined effort to recover the huge income tax
arrears. The recovery of even a fraction of the Rs. 1,15,000 tax arrears
would go a long way in generating resources for the Government. The
Government should set an overall target of recovering tax arrears worth Rs.
1,00,000 crore.

2. Tap Cash Reserves of CPSUs: An analysis of 57 Central Public Sector
Undertakings having positive net worth and net current assets, based upon
the Public Enterprises Survey, 2003-2004, indicated that only 17 PSUs had
invested more than 33 % of their Reserves and Surplus in the year 2003-04.
The remaining 40 PSUs have invested less than 33 %, and a considerable
number have practically not invested at all. In the aggregate, there are 50
CPSUs, which collectively have reserves and surpluses of Rs 2,21,157 crore,
amounting to nearly 7.5 % of GDP, but are actively investing only Rs 81,805
crore, i.e. 37 % of the available resources. A part of these reserves are of
course lent to the Government by holding securities. However, this
disturbing trend towards underinvestment needs to be reversed at once and
the CPSUs reinvigorated to undertake massive capital expenditure,
diversifying their activities if necessary. The Government should also seek
special dividends from those CPSUs, which are holding very high levels of
liquid reserves, in order to finance expenditure in social sectors or
infrastructure. Moreover, they should also be asked to raise the rate of
nominal dividends. The Government should set a target of Rs. 25,000 crore to
be mobilized through dividends from the CPSUs.

3. Restore Capital Gains Tax: The abolition of the long-term capital
gains tax on traded shares and units of Mutual Funds and the reduction of
the short-term capital gains tax to 10 % in Budget 2004 were unnecessary
moves, which has led to revenue losses to the tune of thousands of crores
and encouraged speculative activities in the stock market. Prof. Amaresh
Bagchi of the NIPFP has written, "Since much of economic power accrues to
asset owners in the form of rise in asset values, a tax system that fails to
tax capital gains remains gravely deficient and creates a strong bias in
favour of the rich. Not taxing capital gains also offends efficiency in that
it discriminates in favour of activities like speculation, which beget large
gains quickly, as against risk taking in ordinary business.exempting
long-term gains from only listed equities, as is now proposed, offends not
only fairness but also efficiency by discriminating against the unorganised
corporate sector and unincorporated enterprises - the small and medium
sector - where the bulk of our economic activities take place. In sum, there
is no good reason to exempt long-term capital gains from taxation, and that
too selectively for gains from listed equities, or for taxing short-term
gains at a rate lower than applicable to other incomes, as has been proposed
now. It will grievously damage the income tax base and offend both equity
and efficiency. Can the transaction tax be a substitute for a tax on capital
gains? The answer plainly is "no".[it] can in no way replace the income tax
any more than a sales tax can." (Business Standard, 21.07.04) In order to
correct this pro-speculation, pro-rich slant in the tax system, the
Government should tax capital gains at a flat rate of at least 15%. (It is
noteworthy that most investors in the US pay capital gains tax @ 15% with
some categories of assets inviting capital gains tax @ 25% to 28%)

4. Strengthen Securities Transaction Tax: The primary purpose of the
Securities Transaction Tax (STT) is to check speculative activities and
prevent volatility in the capital market. What the Government seeks to
achieve through differential rates for short-term and long-term capital
gains (i.e. to discourage short-term speculative activities) can be attained
through the STT, provided it is executed properly. The proposed rate of the
STT in Budget 2004 was 0.15 %, to be paid by the buyers in all segments of
the market (equities, bonds, government securities, and derivatives). Due to
protests from market players and intermediaries, the rates were reduced. It
was decided that 0.075 % STT would be charged both on the buyer and the
seller for equities in the case of delivery-based transactions, a paltry
0.015 % for day traders, 0.01 % for the derivatives segment, and nil for
bonds and government securities. The Government lost hundreds of crores
because of this dilution of the STT brought about under pressure from the
speculators and brokers. The STT for day traders was increased from 0.015 %
to 0.02 % cent in Budget 2005. Experience has shown that the doomsday
scenario painted by the critics of the STT were wrong, with the stock
indices surpassing all future highs even after the STT has been introduced.
However, if the objective of the STT is to reduce market volatility and
encourage long-term investments in the stock market, there is no good reason
why the rates of the STT should not be the same for all kinds of stock
transactions, be it delivery-based or non-delivery based, especially since
more than half of the total trading volume in the Indian stock market is
non-delivery based (day-trading). A flat rate of the STT should be fixed at
least at 0.10 % for both delivery-based as well as non-delivery based
transactions. There is no good reason to exempt bonds, derivatives and
government securities transactions from the STT and the same rate should
apply to them as well. The proposed rate of STT, along with the proposed 15%
capital gains tax, can together contribute an additional Rs. 5000 crore to
the exchequer.

5. A Nominal Tax on Foreign Exchange Outflow: The Government should
consider imposing a nominal tax on all foreign exchange outflows. This can
be done easily by levying a nominal 0.5% tax on all purchases of foreign
exchange in India with an exemption limit of $5000. Overseas aid and debt
repayments made by the Government should of course be exempted. The
Government can also exempt items of essential imports from its purview. This
small tax would not only generate substantial revenue but also help to
stabilize 'hot' money flows into our economy and provide some protection
against capital flight. This would also discourage capital flight through
overinvoicing of imports. A sum of Rs 5000 crore can be mobilized through
this tax.

6. Rationalize Corporate Tax Exemptions: Despite having a scheduled
corporate tax rate, which is comparable with developed countries, the
effective tax rate for the private corporate sector in India continues to be
low due to the myriad exemptions. Although some steps were taken in Budget
2005 to do away with some of the corporate tax exemptions, the corporate tax
rate itself was slashed at the same time. This was avoidable. The various
tax exemptions that exist today need to be rationalised. The Government
should urgently review the tax incentives under Section 80IA and 80IB of the
Income Tax Act. Currently, 100% profits are exempted from taxation for a
period of 10 years for infrastructure projects like Highways and Ports,
provision of Telecommunication services, development, operation and
maintenance of Industrial parks and Special Economic Zones and generation,
transmission and distribution of Power. The rate of deduction as well as the
period of the tax concession can be reduced for these infrastructure
projects as well as for industrial undertakings set up in the industrially
backward states. Moreover, exemptions that have been allowed for sectors
like Housing, Shipping, Hotel, Oil Refining etc. should be phased out.

7. Review Export Incentives: The existing set of export incentives also
needs to be reviewed. An estimate made by the Revenue Department suggested
that total duty foregone on account of export incentives was Rs. 39,704
crore, which was 13.6% of total export revenue in 2003-04 (Business
Standard, 08.08.04). Multiplicity of export incentive schemes has also led
to their misuse. The Government should immediately phase out schemes like
the DEPB and EPCG besides curtailing revenue losses on account of Drawbacks
and Advance Licence. Moreover, the tax incentives provided to the SEZ units
under the SEZ Act 2005 also needs to be revisited. Since SEZ units enjoy
customs and excise duty exemptions any way, the case for providing 100%
exemption from tax on profits for the first 5 years and 50% for the next 5
years does not seem to be justifiable. The Exim Policy of Government also
allows duty concessions to the SEZ units for conditional sales to the
Domestic Tariff Area (DTA), which clearly discriminates against exporters
outside the SEZs. Such concessions should be phased out. Overall, the
Government should be able to mobilize Rs. 10,000 crore through the
rationalization of the corporate tax exemptions and export incentives.

8. Broaden Service Tax Base: Although the Service sector accounts for 52
% of India's GDP, tax mobilization from this sector is a small proportion of
total tax revenue. The increase in the rate of the Service Tax to 10% in the
Budget 2004-05 and the broadening of the Service Tax net in 2005-06 were
steps in the right direction. However, the Service Tax target for 2005-06
remained at Rs. 17,500 crore only. M. Govinda Rao of the NIPFP had quoted
estimates by a Government appointed Expert Group to show that the size of
the tax base in respect of some key services like transportation and
storage, post and telecommunications, banking and financial institutions was
likely to be almost Rs 70,000 crore in 1999-00 (EPW, October 20, 2001). He
had suggested broadening the Service Tax base to cover all services except a
well-defined negative and exemption list. The Government should move fast in
this direction. While drawing the exemption list, the Government should be
cautious in avoiding further concessions for sectors, which already enjoy
the benefits of tax incentives, like the Information Technology Enabled
Services. The Government should set an immediate target of mobilizing an
additional Rs. 10,000 crore by broadening the Service Tax base.

9. Mobilize more Wealth Tax: The rate of the Wealth Tax should be
increased from the current 1 % to 3%. The base of the Wealth Tax should also
be broadened. It is evident from the collection of only Rs 265 crore on
account of Wealth Tax in 2004-05 that a lot of scope remains to improve upon
the collection efficiency as well. In rural areas, the base for Wealth Tax
is very low since agricultural land is exempted from being a taxable asset.
The Government should consider the imposition of a land ceiling beyond which
Wealth Tax exemption should not be granted. Moreover, a tax on conversion of
agricultural land for non-agricultural purposes may also be considered.

10. Introduce Inheritance Tax: India does not have any inheritance tax,
while almost all developed countries do. The Government should consider
imposing a progressive Inheritance Tax with a base level of 1% and an
exemption limit of Rs. 15 lakhs. An additional Rs 5000 crore can be
mobilized through the Wealth and Inheritance Tax.

11. Increase Excise Duty on Luxury Vehicles Run on Diesel: Diesel
prices in India are kept low through subsidies in order to facilitate
affordable public transport, low-cost carriage of goods across the country
and benefit the farmers who use diesel in running pump-sets and tractors.
The price differential between petrol and diesel, however, is exploited by
the auto industry to produce diesel run models of their popular cars, which
have less running costs. These private vehicles running on diesel get undue
advantage from the subsidy. Besides, this segment should be taxed with a
higher rate in order to discourage private cars and encourage public
transport, keeping in mind the immense damage that vehicular pollution is
doing to the environment in our cities. The Central Excise Duty levied on
luxury cars and SUVs run on diesel should be increased from the current rate
of 24%. The customs duty on imported cars as well as imported components for
luxury cars should be increased as well.

12. Increase VAT/Sales Tax Rate on Items of Luxury Consumption: Luxury
consumption has to be taxed at a higher rate. A Schedule of luxury items,
which are consumed only by those who are very rich, like diamond jewellery,
luxury cars etc. should be drawn up by the Government. Consumption in places
like Five-Star Hotels should also be included. This Schedule of luxury
consumption items should invite a higher rate of sales tax/VAT. Over 400
shopping malls are currently operating in India and many more are likely to
come up in the near future. These large organized retailers earn huge profit
margins because of economies of scale. Small unorganized retailers find it
difficult to compete with them. A surcharge on the sales tax/VAT payable at
shopping malls should be levied, which besides generating revenue, would
also help in creating a level playing field for small retailers.

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