Home / Opinion / The colonial hangover

It was 10 years ago, on 6 February 2007, that I wrote my first column for the newly launched Mint newspaper. It has been a pleasure and privilege to be associated with the newspaper’s perspicacious editors over the years. The column was named “Bare Talk". “Bare Talk" promised on 6 February 2007 to be “strong, controversial but clear". On the 10th anniversary, it is time to renew the pledge for the next 10 years or longer, God willing.

India’s fiscal budget was announced last week. Usually, columnists such as yours truly are required to file their comments on it within a few hours of all the documents being uploaded on the website of the ministry of finance. It is an impossible task. Some friends were surprised that I was critical of the budget. That gave me an opportunity to read up more and reflect on my own observations. I have not unearthed anything that makes me want to recant.

Some interesting (or disturbing) aspects of the Finance Bill and the finance minister’s speech have caught the attention of journalists and interested parties. One is that the Finance Bill adds an explanation to Section 132 (1) of the Income-Tax Act to remove the obligation on the part of the department to provide reasons for their search and seizure operations to any authority, including the Appellate Tribunals. It has been backdated to 1962. Section 132 (1A) also has been strengthened with such an explanation dating back to 1975. The Telegraph has written a good story on it and points out that these explanations “could remove an impediment to the resolution of a large number of tax cases that have been stuck in courts across the country" (“Recipe For Unfettered Raid Raj", 6 February 2017).

Considering the blight of corruption that pervades all organs of society, it is hard to point fingers at the tax department alone. However, democratic governance requires checks and balances on the untrammelled exercise of executive power. Therefore, a debate on the merits of these amendments is necessary. That said, one should welcome the government’s decision to omit Section 197 (c) of the Finance Act 2016 that empowered tax authorities to reopen assessments going back to the Stone Age.

Separately, the budget proposes to apply tax on capital gains realized on sale of securities on which the short-term transaction tax (STT) has not been paid [Amendment to Section 10(38)]. Some genuine cases will not attract the capital gains tax under this proposal. However, venture capital and private equity investors are alarmed. They acquire shares when the entities are unlisted. So, no STT is paid on acquisition of those shares. They divest when the entities get listed. Now, they will attract capital gains tax under this provision.

This columnist does not have much sympathy for exempting capital gains, arising out of pure financial market transactions, from tax. Contrary to textbook claims, financial markets long ago ceased to be vehicles for efficient capital allocation. Indeed, there is no real merit to exempting capital gains from tax. If income can be taxed, why not capital gains? But it can happen only under a non-usurious tax system. India is not there yet. Rates are high especially in the light of low thresholds. A complex web of exemptions and exceptions makes compliance tricky.

Surjit Bhalla pointed out in a recent seminar in Delhi that tax incidence (“total tax rate" as a percentage of corporate profit) in India computed by the World Bank is one of the highest in the world. It is 60.6%. That is why this columnist finds it disappointing that the government has dragged its feet on the promise of rationalizing corporate taxes. Our tax system—rates, laws and enforcement—remains one of the principal sources of black-money generation.

The government notes, in the macro-economic framework statement for 2017-18, that “the increasing formalization of the economy, nudged by policy, can improve medium-term potential growth". It is good that the government is alive to the possibility. But, formalization would increase only if it is seen as less costly than staying informal. So far, this government has been raising the costs of staying informal. But it has not lowered the costs of being formal.

Coming back to the proposal under Section 10(38), the principle behind it is the problem. In order to catch offenders, it subjects everyone to tax and then provides a list of exceptions. The principle of “prohibited unless explicitly allowed" was used by the British to control the natives. In their country, it was the other way around: “allowed unless prohibited". India’s tax system continues to suffer from the colonial hangover.

While this column has focused on tax provisions in the budget, two other things merit attention. One is that allocations to rural and urban local bodies have increased massively in the last few years—from Rs27,000 crore in 2015-16 to Rs56,000 crore in 2017-18. It may be a small sum in relation to India’s gross domestic product but it might be too large for the local bodies to deploy efficiently. Is there a system in place to monitor the outcomes? Finally, revised estimate (RE) for 2016-17 shows higher capital expenditure than the budget estimate (BE). The budget for 2017-18 improves upon it further. But, the bulk of the higher spending comes from reclassifying revenue expenditure in the BE for the ministry of roads as capital expenditure in the RE. Is there any explanation for it?

V. Anantha Nageswaran is the co-author of Economics Of Derivatives and Can India Grow?.

Comments are welcome at Read Anantha’s previous Mint columns at

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