OECD: More tax reforms

After the recent report of the International Monetary Fund (IMF) reproving the Modi Government for its November 8 decision of demonetising high denomination notes which it contended has dampened consumption and activities across the real sectors of the Indian economy, the Organisation for Economic Cooperation and Development (OECD) did not pass any overt strictures on demonetisation. With the government repeating like parrot that people stoically bore the accompanying pains in the national interest of sucking out black money virus from the economy, the OECD deftly noted that "implementing demonetisation has had transitory and short-term costs but should have long-term benefits".

The 2017 country survey of India of the Paris-based inter-governmental think tank was released by its Secretary-General Angel Gurria in the presence of the Economic Affairs Secretary, Ministry of Finance, Shaktikanta Das on Feb 28 in the capital. Not the one to miss any brownie points embedded in the 142 page tome, Das was quick to highlight a paneled item in the report quoting the OECD that "the shift towards a less cash economy and formalisation should, however, improve the financing of the economy and availability of loans (as a result of the shift from cash to bank deposits) and should promote tax compliance". Das is further sanguine that the low-cost deposits vested with the banks would be available for lending to productive segments of the economy at an affordable rate. This suggestion earlier made known by the Union Finance Minister Arun Jaitley in his February 1 budget for the next fiscal is being sedulously floated by the authorities as if the banks would open the sluice for credit.

With both the banking system and the corporate sector being buffeted by legacy loans of the past that made the twin balance sheet troubles a stark reality to overcome head-on, it would be naïve to suggest that the banking industry is brimful of deposits to be generously distributed as if this would solve the problems plaguing poor domestic investment and equally insipid flow of foreign investment into India. One should not ignore the 2008 global financial meltdown triggered by the sub-prime lending of investment banks in a reckless spree in the United States, from which the world is yet to emerge from the long shadow of slowdown and secular stagnation even after nine years. There is all the more reason to tackle the twin balance sheet problems at a faster lick now than ever sans suggesting a spate of measures that would further attenuate the financial system and lead to prospective financial instability.

Be that as it may, the OECD has rightly pitched for two thematic chapters in the India Survey, the one on making income and property taxes more growth-friendly and redistributive and another on achieving robust and balanced regional development. Both are essential to ensure that the growth momentum of seven per cent which the latest data by the CSO claims that the Indian economy would clock this fiscal despite Demo. Rightly, does the OECD say that income and property tax reforms are crucial to promoting inclusive growth in the light of India's low tax-to-GDP ratio that is the consequence of the relatively low-income level and the high degree of informality? This also, OECD argues, reflects narrow tax bases, due to a wide array of tax spurs which distort the allocation of resources.

Building a robust case for lowering the country's corporate income tax (CIT), it said the amount of revenue raised through the CIT in India is high compared with other BRIICS (Brazil, Russia, India, Indonesia, China, and South Africa) and OECD countries. Fostering business-friendly tax milieu is a key to promoting investment and job creation and to raising India's competitiveness, OECD said citing the latest World Bank Enterprise Survey which revealed that among the list of 15 potential business environment obstacles, the level of tax rates in India comes third after corruption and lack of electricity. While the Modi Government since 2014 had made frontal attacks on the latter two through purposive actions, its laggard steps on the tax front both in the personal income tax and corporate tax remain an arduous work in progress. No wonder, domestic investment as also investment from overseas, flow in dribs and drabs, robbing the potentialities of a high growth economy.

Even as CIT is a key revenue avenue for India—20.6 per cent of total tax revenue and four per cent of GDP, more than in most emerging economies, OECD aptly cites authorities to buttress the point that corporate taxes tend to be particularly harmful to growth and pitches for the overarching need to reduce distortions arising from the CIT instead of using the CIT as the milch-cow to rake in moola. It is said India's corporate income tax is characterised by high statutory rates and many distortions with generous depreciation allowances fostering a bias against labor-intensive activities in a labor-surplus nation, even as concepts like area-based tax relief and Special Economic Zones (SEZs) spawned mixed results. It also pinpointed that the relatively high CIT has made it difficult for India to attract foreign investment. OECD is of the view whether investing via an Indian-resident subsidiary or a (non-resident) branch, a markedly higher tax burden going up to 45.9 per cent would be borne on repatriated income as compared to most alternative investment destinations. In essence, the high statutory rates, combined with the complexity of domestic tax laws and the uncertainty in their interpretation, had all weighed on foreign direct investment. No wonder, India remains a pale shadow of the Middle Kingdom which attracted billions of dollars in its three-decade of non-stop high growth till recently.

As the Government had crossed the mid-term of its tenure a couple of months ago, it is time efforts are being made to set right anomalies in the tax system so that both personal income tax and corporate income tax do actually contribute substantially to nation-building without hurting the stakeholders overtly. The alternative of relying upon consumption tax including the so-called one-nation tax like the goods and services tax (GST) may hurt millions of people living on the margins where inequality of income and unequal opportunities together continue to inflict untold miseries.

In sum, coupled with the ongoing salutary efforts to score healthy and balanced regional development through financial devolution to States from the Centre would help in ensuring inclusive growth at an impressive scale in India, going forward. This is the CRUX of the OECD Survey of India which had only refashioned Jaitley's oft-repeated remark that there is no conflict between pro-growth, pro-corporate and pro-poor objectives if the means well-serve the end of ensuring an egalitarian India.