Going on a tax

From now until the first round of assembly elections this year, India will be hostage to Bengal and Kerala. The Left has started 2006 by reminding everyone that this year will be 2005 with bells on, because they have their castles to protect. Which is why even CMP-mandated 8220;reforms8221; are no longer on the agenda. Marxists have told the finance minister that selling the equity of profit-making, non-navratna PSUs is not on. Evidently, while the government must stick to the CMP, the Left can go well beyond it.

In fact, well beyond reason. The argument that equity sale in a few PSUs is 8220;not the proper way to raise resources8221; is trite to the point of raising worrisome questions on the quality of the economic advice the Left is getting. Disinvestment as a serious option for raising resources was killed the moment this government was formed. PSU equity sale is now important for another purpose 8212; instilling some discipline in managements via minor market participation. To that extent, what the UPA has proposed is a way to strengthen the public sector. The Left should be happy. But instead 8212; and in another indication that impending elections may have addled the country8217;s finest revolutionary brains 8212; Marxists have offered the rotten old chestnut of hiking taxes, including on such items of apparent capitalist sinfulness as watches.

The evidence from India and elsewhere is that lower tax rates generally increase compliance and collections. It is also commonplace in Indian tax policy discussions that poor tax administration is the big hurdle against better revenue collection. Equally widely accepted is that taxes on consumption are a terribly inefficient way to raise resources. But there8217;s one useful thing the Left can do for taxes. It can persuade Mulayam Singh Yadav, chief minister of Uttar Pradesh and the Marxists8217; poster boy of secularism, to implement VAT. UP is such a big state that Mulayam agreeing to VAT will make a huge difference in India8217;s tax administration and results. A huge difference will also result if the UPA agrees to the Left8217;s proposal that bids be called again on the modernisation of Delhi and Mumbai airports. Winter8217;s chaos has shown the costs of deep-freezing airport policy. The government must now tell the Left that continuing national shame cannot be the price for two state elections.