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Wednesday, August 17, 2022

Same old ministry

Is the finance ministry compatible with the 21st century — Modi government must ask the question.

Written by Shaji Vikraman |
Updated: June 8, 2015 12:00:25 am
Paul Simon, minimum alternate tax, minimum alternate tax, MAT, foreign portfolio investors, Central Board of Direct Taxation, CBDT, RBI, RBI repo rate, Sebi, indian express A blueprint for reforming the finance ministry was first approved by Jaswant Singh. Implementing those changes would mean restoring and building institutional capacity by choosing the best and brightest, orchestrating changes from within, launching a wider public consultation process on policies(Reuters photo)

In 1981, when Paul Simon and Art Garfunkel reunited for a concert at New York’s Central Park, they added an extra line to the original version of a popular number, “The Boxer”: “After changes upon changes, we are more or less the same.”

Two recent developments confirm the relevance of this line for the finance ministry. First, of course, is the fiasco over the imposition, that too retrospectively, of the minimum alternate tax (MAT) on foreign portfolio investors. This, even though we have a party in power that pledged to end the “tax terrorism” unleashed by the UPA and bury the ghost of Vodafone. After changes upon changes, we are more or less the same. The second development relates to a story by this newspaper last week on a circular by the Central Board of Direct Taxation (CBDT) telling its field officers to go beyond raids and searches to target tax evaders. The need of the hour is to instil the fear of “incarceration and consequent loss of liberty and social opprobrium”, it says.

What these highlight is the inability to change old mindsets. The finance ministry, unlike the RBI or even Sebi, is an institution yet to see any fundamental reform in its working. As a ministry whose remit and policy decisions influence the functioning of all other ministries and departments, North Block is expected to provide intellectual leadership and professional advice, while holding itself to the highest standards and benchmarks. That sheen and sense of purpose is clearly missing, even as there has been a noticeable deterioration in the quality of officers and bureaucrats for a while now.

Not that there has been no attempt at reform. In 2002, soon after moving from the external affairs ministry to North Block, Jaswant Singh told his officers that no civilised country engaged in raids to collect taxes, relying more on technology to boost revenue and ensure compliance. In the face of resistance from the tax department, Singh approved the launch of the tax information network, or TIN — which throws up a mine of information or data for the tax department to act on — and issued orders to stop harassing taxpayers who sought refunds, as well as put an end to the practice of issuing refunds only after the start of the next fiscal. It is worth reviewing now as to how this technology is being put to use after initial studies showed that collections improved.

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Singh’s then advisor, Vijay Kelkar, and another expert, Parthasarathi Shome, listed the steps needed to reform India’s tax department to bring it on par with modern economies. That would imply ensuring better delivery of services to India’s taxpayers, separating tax policy from administration and integrating the two boards that handle direct and indirect taxes, the CBDT and the Central Board of Excise and Customs, besides providing clarity and stability on tax policies. The BJP may talk about “tax terrorism”, a phrase it coined, but few are convinced there is a resolve to overhaul tax administration and policy, and convince investors and taxpayers that the system is fair. The finance ministry tends to be compared to the treasury departments in the UK, US and Japan, whose mission statements promise fair and equitable treatment to taxpayers. Add to this metrics used to measure customer value and service priorities. Israel’s ministry of economy has a chief scientific officer who, like an angel investor, is assessed based on performance and returns. Increasingly, governments are being tested on their articulation of policy goals and commitment to deliver.

What’s worrying is the apparent reluctance to break the mould and reclaim the kind of thought leadership and professionalism that marks the finance ministry from other wings of the federal government. In the decade of the reforms, that may have been possible due to the right mix of technocrats, outsiders and civil servants grounded in economic management, a consensual approach and openness to outside advice and ideas. Much of this process took place in the department of economic affairs, the heart of the ministry.

Over the last few years, it has become more about squeezing spending to restore some fiscal balance. Much of the action has now shifted to the states, with the landmark change in federal transfers to the states. But with the political mandate this government has and four years still to go, there is a great opportunity to carry out changes within the finance ministry to make it compatible with the 21st century. A blueprint for that was first approved by Singh, who had carried out a similar exercise in the external affairs ministry. Implementing those changes would mean restoring and building institutional capacity by choosing the best and brightest, orchestrating changes from within, launching a wider public consultation process on policies for the near and medium term, pushing for an end to bureaucratic capture of institutions and emerging as a springboard for policy ideas for the government exclusive of the Niti Aayog. Some governments may equate reform with creating new institutions. But reform is also about building on the strengths and traditions of existing ones, rather than undermining them based on fashionable theoretical concepts and poor reasoning.


The finance ministry works closely with the G-20 secretariat, and may well be aware of the policy goals and mission statements of its counterpart ministries. It may not be fair to compare it to some of the world’s best treasury departments, but the US treasury, in its strategic plan for 2014-17, says that overall, it will strive to produce the best value for all its customers and the American people. If at all there is a parallel between the reform period of the 1990s and now, it is the strong political cover that the finance minister has to alter set practices. Someone as politically savvy as Arun Jaitley must have recognised many of these challenges. Now, as head of this ministry, he must want to improve upon the terrible legacy of a particular predecessor who was in office a few years ago. Repairing that damage and doing a course correction — the impact of which is bound to be felt only with a lag — will call for the political executive to set the terms of engagement and signal changes. Else, we may again be forced to settle for “The Boxer”.

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First published on: 08-06-2015 at 12:00:22 am
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