Opinion: Legacy Of 'Tax Terrorism' In Mod's 'One Year' Rule

In its first year, Modi government has undertaken a major economic restructuring. But it has also scored policy self-goals.

There is a restructuring of the economy underway by Prime Minister Narendra Modi, and this is not just short-term cyclical stuff. The restructuring involves a change in the socialist mindset, and despite all the faults of this government, Modi’s first year has been remarkably good. You may not know it or believe it but the revolution being ushered in, while not quite here, will get there.

Labour laws are being reformed in a major way. Once the land acquisition bill is passed, India will finally begin to be competitive. Even if the Congress’s obstinacy prevents the passage of the land bill, there are encouraging signs that “land reform” may go the labour reform way. That is, it will be implemented on a state-by-state basis. That is to be preferred. Let the Congress-ruled states fall even further behind in terms of growth for the aam aurat. Apne aap samajh aa jayegi (they’ll learn).
The biggest fault of the UPA government was high inflation. Starting in 2007 and continuing for the next six years, seven-year CPI inflation averaged the second-highest ever — 10.2 per cent, almost equal to the highest, 10.3 per cent in 1996. 

Compared to that, inflation in April 2015 was a low 4.9 per cent. At first glance, this might indicate the influence of declining oil, food and commodity prices. However, that interpretation is not entirely correct. Seasonally adjusted six-month inflation was 5 per cent in June 2014, 6.2 per cent in September 2014, and 4.3 per cent in October 2014. Brent oil was $103 in August 2014 and $95 in September 2014.

It is another story as to whether the Modi government has been able to get the message of its success across. This may have to do with some of its self-induced failures. One failure I want to discuss in detail is retrospective tax or tax terrorism (TT). The “structural change” election result of May 2014 can be viewed partly as a protest against TT. It was widely predicted, and recommended, that repeal of the retrospective tax would be the first and lowest hanging fruit of economic reform. After all, the BJP had invented the phrase “tax terrorism” and included it in its 2014 manifesto.

Hence, it was surprising when the government shied away from making any effort to dismantle the dreaded retrospective tax legislation in the July 2014 interim budget. But hope still remained. Therefore, when Finance Minister Arun Jaitley presented the budget in February this year, while he explicitly ruled out retrospective taxes in future, hope sprang eternal that, at worst, there would be a benign neglect
of past cases. This was more reasonable because the government had also not pursued the TT cases it had lost.

The nation wants to know why the BJP allowed big-time TT to creep in when it instigated retrospective MAT taxes against FIIs. I have asked many individuals about their best interpretation of why the BJP indulged in “apne pair pe kulhadi (hit your own foot with an axe)”. No one has provided an answer. So was it just a case of legacy, of continuing with the past, because that is how we are and always have been? Yes, that is the best answer I can come up with, and it is not as “un-sinister” as it sounds.

The Congress has ruled India for nearly 60 of the last 68 years. That is legacy. What that means is most, if not all, Indian industrialists are beholden to it. What that means is most, if not all, of the senior Indian bureaucracy is obligated to the Congress for its career. The Congress, with dynasty, but rudderless and leaderless, is desperate for a change in its fortunes.

The best and only way for the Congress to get an inch back is to make people believe there is no difference between it and Modi. “The more things change, the more they remain the same” is the repetitive mantra you hear from the ConBhakts. What better way to achieve similarity than to get the BJP to enforce the very policy that brought it down? So the cabal gets together and drafts the policy. Start with the MAT, continue with land acquisition, who knows, soon the bureaucracy will be recommending reinforcing NREGA and an even more enhanced “food security” bill.

Assume I am right about there being Congress moles in various layers of the system. Assume they did bring to Jaitley and Modi’s attention the “legacy” needs of the retrospective tax. Why did the BJP have to accept this Trojan horse? One doesn’t need to be a lawyer or even an economist to recognise that a retrospective tax is terrorism. And certainly, Modi and the BJP benefited enormously from the Congress’s operation of this terror. But continuing to do the same — is that logical or beyond stupid?

Some say we have to treat FIIs with kid gloves because they finance our deficits, and with so much equity purchase (50 per cent of floating capital), they can wreck the stock market and the economy. That maybe is what the moles were hoping for (and did they succeed!). But the FIIs should not be treated with kid gloves; they should be treated like everyone else. Retrospective taxation should be abolished because TT is wrong. Changing the rules of the game after the match has ended is a law no one can endorse.

But we can’t rely on the Supreme Court to rule this unconstitutional because, for it, everything is constitutional — even an emergency. The SC has just mandated that to prevent a personality cult, public funds can only be used for displaying pictures of the president, PM and, wait for it, the chief justice of India! Regardless of public funds, what constitution can be interpreted so specifically? And only to mention the obvious, till date we don’t have a personality cult for the CJI. Is the SC now mandating that we do?

Getting back to TT. The retrospective tax has to be killed, not because we want to please FIIs but because, according to ancient Hindu principles, India wants to be both fair and just.