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EDITOR's KEYBOARD - FROM ARCHIVE

Damodaran Committee Report - A Timely Advisory to Govt for 'Doing Serious Regulatory Business'
By Shailendra Kumar, Founder Editor (September 26, 2013)
Aug 02, 2021

THE World Bank annually comes out with a very popular 'Doing Business Report' (DBR). Much to the credit of this global financial body, its Report has indeed done a world of good to many economies by sensitising the reform-parroting political powers. In fact, what its confidential bundle of country-specific suggestions could not achieve in the past, this innovative Report has indeed done that. And, its impact can be seen in a very short span of time. It all started with the original paper published by Djankov et al in 2002. Initially, it started ranking economies against a basket of parameters. After a lot of hue and cry, a review was undertaken, and the overall ranking concept was dispensed with. Instead, this Report ranks an economy against a specific filter. Since India was consistently doing badly against certain filters, the Ministry of Corporate Affairs had last year set up the Damodaran Committee to suggest measures for regulatory reforms in the country. And Mr M Damodaran, a former bureaucrat, has submitted his Report recently. Although one may not find many exhaustive solutions to some of Sisyphean issues vexing the economy but this Committee has pooled in some of the ideas together at one place. But, unfortunately, the timing of this Report is not favourable particularly when the political leaders are biting their nails over alliances for the forthcoming general elections.

Nonetheless it is worth talking about some of the relevant observations of this Committee. So far as taxation is concerned, as per the DBR 2013, India has done well as far as electronic aspect of paying taxes goes. It has been ranked 74 th out of 185 economies. This is because of the recent initiatives of the Central as well as State Governments to allow e-filing of returns and e-paying taxes. In terms of this ranking India has been clubbed with Australia and Mauritius. However, in terms of paying taxes, it has been ranked 152 nd. This is largely because a business entity in India needs to pay different types of taxes at least 33 times in a year. And it costs 243 hours for a taxpayer. And the total incidence of taxation eats away as much as 62% of profit generated.

On this issue, the Damodaran Panel has observed that " while there is no doubt that the filing of returns and the payment of taxes has been significantly simplified, the same cannot be said about the post filing issues that the average taxpayer often has to contend with. Despite protestations of an improvement in mindset, the needless adversary relationship between assessing authorities and the taxpayers continues to be a fact of life. This is further compounded by a perverse incentivisation system in which gross tax collections are treated as a major indicator of good performance..."

TIOL would like to support such an observation of the panel. It is an ugly fact of our system that our political masters and the top policy makers tend to attach greater importance to only an increase in the revenue collections. This infuses a perennial bias or call it ugliness in our system. It mops up revenue at all costs so that the bosses are happy and they are not shifted out of their cosy slots or cities of their choice. Even if a good performance is defined by giving due weightage to other facets of tax administration, the mindset of our political masters is such that it would always look for Gross Collections figures rather than grossly fair system . Thanks to this only-revenue bias, a lot of manipulations creep into our system. For instance, towards the last leg of the fiscal year, a good number of assessees are persuaded to deposit more taxes in the PLA on the promise that they would be allowed to avail CENVAT Credit or take refund immediately after the curtain comes down over the fiscal year. Such 'artificial' collections do no good to the interests of the Exchequer but it does help the Finance Minister in making a tall political claim on the floor of the House that they have done it as per their projections in the Budget.

The Damodaran Committee further notes that "... there are a number of proceedings pending in respect of matters the principles of which have already been decided by a higher forum such as the Income Tax Appellate Tribunal. In an attempt to increase the annual collection of taxes, assessing authorities do not take cognizance of rulings by higher authorities in matters where the facts in issue and the principles of law are identical. This has the further drawback of crowding the system with matters which should have been decided at the level of the assessing authority. While it is appreciated that the judgement of the assessing authority cannot be substituted by the directions of higher authorities there would be no harm in the issuance of a general circular to the effect that assessing authorities would be obliged to take note of rulings of higher authorities in identical matters."

By making this observation, Mr Damodaran has indeed hammered the nail hard on the weakest part of tax system. In simple words, our tax administration is notoriously litigation-friendly, and it hurts India's interests globally. Even on a small pretext, our taxmen never feel shy in issuing a show cause notice or raising a demand or adjusting pending refunds of an assessee against a fictitious demand raised to meet the revenue targets. So, the root of the problem is lopsided focus on GROSS REVENUE . Such a 'devil' literally compels the assessing officers to ignore the rulings of higher courts and raise a demand and if possible, recover something quickly. This not only crowds our system but also militates against the desire of a taxpayer for higher compliance. Having got a bitter taste of unfair demand, they tend to resort to corrupt methods to wriggle out of the sticky demand rather than going to the courts. If that does not work well, they prefer settling the issue at the level of appellate authorities by resorting to malpractices. To overcome this situation, the Committee has called for a General Circular, which may bind assessing officers to comply with rulings of higher forums. On this count, the Committee appears to be erroneously optimistic about remedying the situation. No Circular or decision of top courts would cut much ice unless the root cause is remedied i.e. fixation of targets by the policy makers.

Another point, which Mr Damodaran has touched upon, is the retrospective taxation. He has underlined that "... Retrospective taxation has the undesirable effect of creating major uncertainties in the business environment and constituting a significant disincentive for persons wishing to do business in India. While the legal powers of a Government extend to giving retrospective effect to taxation proposals, it might not pass the test of certainty and continuity. This is a major area where improvements should be attempted sooner rather than later since business cannot take corrective action retrospectively."

The cruel truth of the science of Nature is that a tax law may be amended retrospectively but no business can take remedial steps retrospectively . However, exceptions can always be made to remedy an error or shortcoming in the phrasing of legal language although the intention was always clear. While talking about retro measures the Committee has not referred to any specific case but it seems it has obliquely hinted at Vodafone case. Since the Committee has not commented on the merit of any specific case, its general observations against retro amendments deserve support as such steps necessarily go against the spirit of certainty and continuity. Certainty is believed to be the soul of tax laws , and India should leave no stone unturned to earn such a virtue in the coming years.

Apart from taxation, the Damodaran Committee has touched the issues of difficulties faced to start a new business; time taken to obtain construction permits and the time taken for enforcing contracts. With respect to the poor ranking of India against the parameter of starting a new business the Committee has stated that "... the large number of approvals, the difficulty in getting land, the time taken in getting electricity and water connections and a number of other factors make it a daunting task for any person contemplating to set up a business in India. The fact that some of these approval processes run sequentially and not parallelly also adds to the total time taken for a person to set up a new enterprise. While single window mechanisms have often been talked about, the implementation of this instrumentality has not kept pace. Further, wherever single window authorities have been set up inadequate empowerment of such authorities has turned out to be a major stumbling block in granting expeditious approvals."

Such observations do mirror the ground realities of commencing a new business in India. Although the slogan of single window clearance is pretty ancient in India, it has so far not cut much 'flesh' of our red tape system. A fresh regulatory reform is indeed required to be attempted simultaneously by all the layers of governments as starting a business does require the approvals right from the municipality or state to the central government. Therefore, each sub-sector needs to be identified and the maze of procedures needs to be cut through. Getting electricity has in particular attracted the attention of the DBR, which has given 105 th ranking to India. Although India has expanded its capacity to produce more power and has also generated more but it has not been able to reduce the cost of increasing power load in terms of KW and the red tapism involved in this activity. It is needless to say that greater the size of red tapism, higher would be the corruption index. TIOL is aware of many FDI-carriers moving away from certain cities not because of non-availability of power but because of red tapism involved in getting electricity connection.

In a nutshell, the Damodaran Committee Report should get adequate attention of our policy makers, and all efforts should be made to reform the regulatory environment in the country. It would be more desirable to set up a Regulatory Review Authority , which should be saddled with the task of regularly reviewing different Central, State and local regulations, and keep sensitising all such authorities to amend the laws in tune with the changing time and business environment. This is how badly battered Greece and Portugal have shown unmistakable signs of quick recovery in the recent times. So, if India has to emerge as a powerful economic engine for the global economy, it has to quickly embark on the overdue legal reforms path.