Economic
Highlights
New Delhi, 2 July 2012
PM Strikes Right Chord
WILL ECONOMY BOUNCE BACK?
By Shivaji Sarkar
Prime Minister Manmohan
Singh has struck the right chord by agreeing to look at tax laws afresh. His
first decision after taking over the Finance Ministry’s reins following Pranab
Mukherjee resignation to fight the Presidential pool. We need to overcome the atmosphere of
pessimism and negativity, Singh told North block mandarins. Also, he invited
suggestions for revving up the economy, a welcome move to connect with people.
But, he should not
restrict this to issues like general anti-avoidance rule (GAAR) and
retrospective tax that are affecting Vodafone and some large firms. As taxation
laws, rules and system need a total review and revamp. He needs to do away with
TDS on bank deposits as it is a hindrance for people to function through the
banks.
Besides, he has also to
ask banks to reduce their charges, which have increased nearly ten times during
the past few years. In fact, the country needs an enabling tax system and
liberalisation from the colonial and socialistic mindset. In both, people earn
only to feed the State whereby individuals have little right to enjoy the
fruits of their labour. Given that stringent rules are based on distrust which
every taxpayer tries to evade and does not trust the taxmen. Thus, a mutual
see-saw continues.
Undoubtedly, the
Government has to be willing to think outside the ‘liberalisation box’.
Wherein, it needs to consider reviving regional stock exchanges as their demise
has made it difficult to mop up widely distributed local capital.
Additionally, the Prime Minister
is concerned about the exchange rate, the drying up of capital flows,
unsatisfactory industrial performance and uncontrolled inflation. All this
would impact revenue realisation. Indeed, his concern is genuine. On the anvil
is also a shake-up of the Ministries of coal steel, power, aviation, railways
and urban development. Measures, to revive the economy and give special impetus
to foreign investment as the country needs investment.
Add to this, huge cash
reserves of Indian companies are not being put to productive use like
expansion, acquisition and investment in new businesses which is hurting
growth.
Think. Four companies, Reliance
Industries, Coal India,
Wipro and Infosys have aggregate cash and bank balances totaling nearly Rs
80,000 crore in 2011-12 and had added Rs 21,645 crore to their cash balances in
the last year. Reliance alone added Rs 12,463 crore to its kitty. In all 23 of
41 companies listed on the National Stock Exchange (NSE)-50, excluding banks
and financial services saw a rise in their cash holdings. Manmohan Singh needs
to address this.
Perhaps, smaller
companies too are adding to their kitty while others are not bringing their
cash to the market. Raising a moot point: Why is there such huge idling of cash
reserves? Thus, the Finance Ministry needs to help these companies to enable large
sums of monies coming up for investment in desired areas.
Remember, foreign
investments do not come without strings. Many companies repatriate huge funds
every year, more than what they invest. So looking at domestic funds and
encouraging it to play a significant role might boost the economy as never
before.
Alas, this is not
happening because the atmosphere is not conducive. Over-reliance on foreign
institutional investment (FII) for short-term investments in the stock market
has created a risky scenario whereby it is easier to take out FII investment.
Since January, this has been rapidly taking place. Also, the current decline in
the rupee value has been accelerated by the flight of FII capital from the
country.
Consequently, the
obvious way to ease the pressure is via foreign direct investment (FDI). Not
only do the funds remain for a longer term but it is difficult for companies to
pull out. But of late, the flow has trickled because investors are not buoyed
by the atmosphere in the country. And, if they are at all willing to invest,
they lay additional conditionalities.
The Prime Minister is
not unaware of this. He has to smoothen the path given the many road blocks. Along-with
boosting investors’ confidence and reining in the taxmen as investors are
worried on this front. On the flip side, taxmen cannot be blamed as rules have
been framed in a way that make it incumbent for everybody to be questioned resulting
in concomitant discomfort.
Undeniably, India has to
break away from the western system of controlling all activities from the Centre.
Companies have to be allowed the freedom to function and should be encouraged
to pay tax, which they normally do but since the rates of taxes are high and
computation complicated, they spend more on preparing the balance sheet.
True, the country has reduced
tax rates over the years. But it needs to reduce more and make tax computation
easier. This would help both the corporate and Government. Wherein both would
be able to reduce unnecessary expenses on preparing and scrutinising
complicated figures. The right mix would be by lowering the tax rates and reducing
the tax bureaucracy number. The maximum rates could be reduced to 20 per cent.
Moreover, if a company
fails to pay tax for some reasons, it should be allowed to pay it in
instalments without any punitive charges or interest. As, the present system of
attaching or sealing bank accounts is counter-productive. It packs a company
out of business. Simultaneously, many other problems need to be eased out.
Pertinently, it is for
this reason the Rs 1450 flat tax scheme for small businesses failed as these
businesses faced more harassment and finally decided not to pay at all. Therefore,
the Direct Tax Code needs to be revised and simplified, not be a compendium of
rules. A basic guide not exceeding 30 pages.
Further, the individual
tax payer has to be given relief and freed from TDS on his small bank deposits.
Many small businesses are not putting their money in banks for this reason.
They all want to pay tax ---- something they can afford not what the State
feels they must pay.
In sum, why does not the
Government consider freeing all bank deposits or interest earnings up to Rs 10
lakh out of the purview of tax? This would not only increase sagging deposits in
banks but also make available more money for lending, thereby paving way for
the economy to bounce back. ----- INFA
(Copyright,
India News and Feature Alliance)
|