Wednesday, 21 May 2014

Possible Tax Reforms under Modi led Government

India is hoping that the Narendra Modi-led government will take tough policy decisions essential to revive growth in the South Asian economy.

Subramanian Swamy, the right-wing Bharatiya Janata Party member who is likely to find himself in a key policy role in Mr. Modi’s government, spoke to The Wall Street Journal about the immediate economic priorities for the incoming government, including putting an end to what he calls, “tax terrorism.”

The Wall Street Journal: What will be some of the economic priorities of the government?

Subramanian Swamy: The priority for the government will be to rectify the budget, which is a complete mess. You are on the verge of either a financial blowout or a bankruptcy. So, we have to get resources from extra budgetary sources, such as auctioning of 2G, 3G, 4G spectrum, which are presently being given away at throwaway prices.

Besides auctioning natural resources, the government should also reduce taxes so that growth increases. We also need to make agriculture globally competitive. As of now, the price of agricultural products in India is the lowest in the world. Yield per acre is also one of the lowest in the world. So we have to raise farm productivity and also be able to provide a high enough price for farmers to make a profit.

WSJ: What sort of reforms are expected from the new government?

Mr. Swamy: Tax reforms will be the first priority. We will end what we have called “tax terrorism” by the outgoing government. The immediate priority is to boost the rate of savings. We will make savings tax-deductible, including debentures, equities, bonds and time deposits. I have also recommended abolishing income tax.

It also turns out that out of 2,791 commodities that are subject to excise duty, the first 22 give you 90% of revenue. So, why should you put all of them on the list? We will say [to companies] that we are removing excise duty from your commodity, but you will have to pass it on to consumers, so prices come down. We need to reduce taxes on kerosene, petrol and so on. I don’t buy this argument that oil prices abroad are so high and that you will have to subsidize. Take for example petrol, which sells at 75 rupees a liter, but actual cost to petrol retailers is 31 rupees. The rest is all taxes. If we remove the taxes, there will be no [need for] subsidy.

WSJ: Won’t lowering taxes hurt revenue?

Mr. Swamy: Do you know how much we will get from 4G spectrum? How much we will get from coal blocks? We will get 11 trillion rupees [$187 billion] from a coal-block auction alone in one year.

WSJ: You have talked about encouraging savings to provide funds for investments. But is the environment right?

Mr. Swamy: Absolutely. There is only lack of confidence. You see a decisive government create incentives; Indian industrialists are capable of taking advantage. I would also like lower interest rates. That’s why I want the Reserve Bank of India Governor to be removed. [Raghuram Rajan] says I controlled inflation. The interest rate has to be lowered. Otherwise it will be difficult for us to open our door to foreign direct investment.

WSJ: Will the BJP government shut down some of the country’s existing welfare programs?

Mr. Swamy: It’s not a question of shutting down. It’s a question of finding new ways of reaching the people who are just above the poverty line or just below the poverty line. Instead of ration shops, I would prefer coupons for all subsidies, particularly to those who have children going to school. Give them coupons instead of subsidies. So they go to normal shops, buy products and give these coupons in addition to cash.

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