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PM Strikes Right Chord: WILL ECONOMY BOUNCE BACK?, By Shivaji Sarkar, 2 July, 2012 Print E-mail

Economic Highlights

New Delhi, 2 July 2012

PM Strikes Right Chord


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)

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