India's Next Budget Needs a Vision for Leading Asia
February 23, 2015 in Economics
By Swaminathan S. Anklesaria Aiyar
Swaminathan S. Anklesaria Aiyar
Does Indian Finance Minister Arun Jaitley have a fiscal vision that can inspire and stir the blood? He will present his second budget on February 28. His first effort was a patchwork affair in the middle of the last fiscal year after winning the general election. Jaitley then lacked time for a major fiscal overhaul; this time he must deliver.
He should frame his budget as the first step in India becoming the leading Asian tiger. Toward this end, he should pledge to reform India’s direct tax rates and practices to compete with the best in the Asian neighborhood.
Back in 1997, Finance Minister Chidambaram presented a vision of competing with ASEAN in import duties as a first step to becoming an economic tiger. This meant reducing India ’s standard import tariff from 50 percent to 8-10 percent in stages. This vision was adopted by succeeding finance ministers of other parties, and the target of ASEAN equivalence was met in 2004. This helped accelerate GDP growth to over 8 percent over the next five years.
“India’s 2015 budget will need to address several key areas.”
Jaitley should follow the same path with regards to direct taxes. India’s maximum income tax rate of 33.9 percent is well above that of Singapore, but competitive with most other Asian states. But its corporate tax rate of 34 percent is much higher than in China (25 percent), Thailand (20 percent), Malaysia (25 percent), and Indonesia (25 percent). India should cut its rate to 25 percent, and simultaneously trim its multitude of tax exemptions, to be more in line with competing countries.
Prime Minister Narendra Modi recently promised an end to “tax terrorism.” Unable to meet revenue targets in recent years, Indian taxmen have cracked down in irrational ways on supposed tax evasion by multinationals like Vodafone and Shell. Jaitley should aim to grow revenue by attracting additional investment rather than through tax terrorism. He should align India’s transfer pricing rules, advance tax rulings, and other tax practices with those of Asian competitors.
Jaitley aims for a constitutional amendment to create a unified Goods and Services Tax (GST) in place of the current complicated system that divides powers of indirect taxation between the central and state governments. The existing system leads to tax cascades and huge opportunities for corruption and evasion. Experts estimate that a unified GST could raise GDP by 2-2.5 percent. But …read more
Source: OP-EDS
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