Left is right

It is possible in India to make a living, and a very good one at that, by simply abusing tax exemptions and concessions. This state-mandated private enrichment that distorts economic signals has received far less attention than should be the case in a reforming economy. That this issue has inspired a major pre-budget Left demand is therefore a good thing. Were the government to take this bit of the Left8217;s wish-list entirely seriously, the budget document, and the duty lists, would be slimmer; tax revenues, higher; crooked transactions, fewer and incentives, more rational. The excise duty list in India runs to 700-odd pages. Nearly a third of this Kafka-esque work is devoted to exemptions.

The passbook scheme for exporters, to which the Left memorandum makes a specific mention, has around a score of exemptions. Chocolate and chocolate preparations are sharply, if strangely, differentiated in the Indian tax system, which also allows a big manufacturer, say, of butter, to avail of small-scale sector duty exemptions by starting a unit producing biscuits. The Directorate of Revenue Intelligence raids that discovered the rich and the well-connected buying super premium foreign cars and SUVs 8212; these were imported at paltry duties by enterprising fellows who promised they would be used to ferry dollar-spending tourists 8212; is another striking example of a tax philosophy gone haywire.

The Left8217;s argument that duty concessions linked to foreign exchange earning capacity should be reviewed because dollar scarcity doesn8217;t keep RBI up at nights anymore, is perfectly valid. So are arguments that many exemptions are lobby-inspired and have little to do with economic incentives. In fact, the problems go deeper. The culture of tax concessions has come in handy for state governments competing for private investment. Competitive tax breaks are producing a situation where a state like Himachal Pradesh, not quite suited by topography and environment to become an industry hub, can outbid a natural industry host like Punjab. But whatever the distortions, tax breaks are both easy and profitable for many politicians. That makes the Left8217;s intervention even more right.