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Not all black or white now

india Updated: May 08, 2012 23:22 IST

Hindustan Times
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The tax proposals finance minister Pranab Mukherjee was forced to water down this week had a common thread running through them. They were all designed to unearth black money. Token surveillance taxes on jewellery and house sales by themselves do not impose economic hardship. Nor are they politically unpalatable. Transaction taxes on investment assets and tighter surveillance are the answer to repeated questions on what the government is doing about the parallel economy. Mr Mukherjee was merely trying to turn the light on dark pools of unaccounted Indian wealth: gold, property and hawala. That these policing measures had to go is a disturbing development after widespread public outrage over corruption in recent months.

There are persuasive arguments against using taxes for surveillance. The one proposed on sale of property is a case in point. A new tax doesn't capture the extent to which property deals are undervalued while paying stamp duty. If a tax on transaction can fix the problem, stamp duty should have been able to do so. Two, the scale of collecting taxes from property sales is daunting. Which is why the state governments, as opposed to a single central agency, levy this particular impost. What Mr Mukherjee had proposed would have added another pair of eyes to every deal, but they are not likely to see anything different. Gold, on the other hand, is lar-gely untaxed and makes a stronger case for a policing duty. But the government could separate the legitimate need for holding gold as a hedge against inflation from the desire to park ill-gotten gains by introducing gilts indexed to the general price level. Finally, the reason physical assets absorb so much of India's black money is beca-use they are much harder to monitor than any money trail. The only tax designed to keep tabs on deals that has endured is the sec-urities transaction tax, mainly because trades are conducted in the closed loop of electronic exchanges and not in the real economy.

Since the law cannot administer itself, the next best course is to empower the enforcer. Mr Mukherjee's anti-tax avoidance rules upended the assumption of innocence that is the basis of Indian law. The onus of proving individual transactions are not conducted merely to avoid tax should lie with the taxman, not the taxpayer. This rollback is entirely warranted; the original proposal would have raised compliance costs considerably. The year's delay in implementing the anti-tax avoidance rules push them beyond the tenure of this government, raising foreign investors' expectations that they could be toned down further. The most vocal lobbying centred on Mr Mukherjee's proposals to tax foreign investment deals in retrospect. In the event, the finance minister has not given much ground. Deals conducted abroad will have to pay local taxes if a large chunk of assets being transferred is Indian, unless tax treaties grant them immunity.

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