Newspapers Editorial Analysis 29 November 2017

Newspaper's Editorial Analysis 29 November 2017


The second round of the Indian tax reforms

  • The government has appointed a committee headed by Arbind Modi to review the Income Tax Act of 1961
  • This is a welcome move, and comes in the wake of the transition to a new indirect tax regime with the introduction of the goods and services tax (GST)
  • Benefit: a new direct tax system could help lower GST rates in the future
  • A clean direct tax code should help promote economic efficiency as well as protect horizontal and vertical equity
  • The code will cover income tax, corporate tax, dividend distribution tax, fringe benefit tax and wealth tax

Issues with existing direct tax law

  • Existing tax law
    (1) is extremely complicated,
    (2) has ambiguities that create an excess of litigation,
    (3) offers scope for administrative discretion that is often the fount of corruption,
    (4) imposes high costs of compliance that especially hurt those with lower incomes,
    (5) and has many exemptions that hurt allocative efficiency by distorting the decisions of participants in the economy

Features of the Direct Tax Code 2009

  1. All direct taxes were to be brought under a single code with unified compliance procedures
  2. The code was drafted in simple language to minimize ambiguities; every subsection was a short sentence to convey a single point
  3. The code aimed at flexibility by keeping only general tax principles in the law, while details were found in the income-tax rules
  4. Unfortunately, did not make it to Parliament

The new tax system will serve two very important political economy functions

  • It is no secret that too few Indians pay direct taxes
  • There is only one Indian filing annual tax returns for every 16 voters
  • And the fact that millions of voters do not earn income because of their age or gender is balanced by the fact that not every person who files his tax returns actually pays tax
  • As we argued in these pages earlier, this asymmetry between direct tax payers and voters has created a political system
  • This system cares more about spending to buy votes rather than building a more effective tax system that will spur economic growth


  • The inability to grow the direct tax base rapidly enough has meant that the Indian state has to depend a lot on indirect taxes, which are fundamentally regressive
  • That is true even in the case of a value-added tax such as the GST
  • Almost nine out of every ten rupees collected by the government before the economic reforms came from regressive indirect taxes, a testimony to the hypocrisy of Indian socialism
  • There is a far better balance between direct and indirect taxes now, thanks to the tax reforms of the 1990s
  • But the proportion of direct taxes in the total pool has to increase further to make the tax system more progressive

Benefits of a Clean Direct Tax Code

  • A clean direct tax code will help achieve three key goals
  • First, it will help make the Indian economy more competitive through tax stability, minimal exemptions and the focus on allocative efficiency
  • Second, it could alter the Indian social contract by increasing the number of people paying income taxes
  • Third, higher direct tax collections could lower the tax burden on the poor by creating fiscal space for a reduction in GST rates

The way forward

  • The focus right now should not be on lowering marginal tax rates(to global competitive level) but on increasing the tax base through a better direct tax system.


The Mumbai-Ahmedabad High-Speed Rail (MAHSR) project

  • This project is the most ambitious and largest rail project envisaged in India
  • It will propel India to the elite league of nations that run high-speed trains and is, therefore, also a project that would symbolise and instil national pride
  • At over 300 kmph, it would also mark a paradigm shift for the Indian Railways (IR), which still has average speeds in the range of 50 and 23 kmph for passenger and goods trains respectively

About High Speed Rail (HSR)

  1. HSR, defined in terms of speeds above 250 kmph (MAHSR is designed for maximum speed of 350 kmph and operational speed of 320 kmph), does not represent an incremental improvement over conventional systems, but combines technologies to take rail travel to new dimensions
  2. Presently, only 15 countries have HSR

Benefits of HSR

  • Wherever HSR has been built, it has brought about profound development over corridors in terms of economic opportunities, employment and environment-friendly transport
  • In all cases, a massive shift away from air travel and automobiles has also been noticed
  • Closer economic linkages will convert the entire corridor into an economic cluster
  • Other benefits that would come with the project are generation of employment of about 40,000 persons during the construction phase, skill upgradation of local residents who will engage with the project and that of railway personnel who would be trained at the state-or-the-art High-speed Training Centre
  • The project would generate demand for transport and warehousing due to high cement and steel requirements

Poor safety record of railways

  1. There have been multiple rail accidents in recent past.
  2. This has been due to surface crossings, habitations close to tracks and the low margin for maintenance.

Initiatives by Indian Railways to improve safety

  • Major upgradation efforts comprising of two dedicated freight corridors, improvements to signalling, new coaching and freight stock and over 20,000 km of doubling, quadrupling, gauge conversion, etc, are in the offing
  • To improve safety, a Rashtriya Rail Sanraksha Kosh, with a corpus of Rs 1 lakh crore to be spent over in five years, has been set up with a focus on asset renewal and elimination of unmanned level crossings

Way Forward

  • MAHSR is a futuristic project
  • India can’t remain satisfied with average speeds of 50 kmph for passenger trains forever
  • IR shuold look at a leap of technology



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