Jul 5, 2014

Open Letter VII to Shri Narendra Modi: Simplify our taxes to put India on the global economic leadership orbit

Shri Narendra Modi
Prime Minister

Simplify all the taxes that the Government levies. It will not only raise compliance, but will actually start achieving the goals of taxation.

We have been modelling our governance, as a later age democracy, on the basis of what the West has had been doing.

Income Tax: If the goal of anyone aspiring to achieve growth and progress, whether an individual, a society, a nation or a civilization then having progressive Income Tax defeats the basic premise of undertaking any economic or business initiative. In a progressive Income Tax regime those who produce larger incomes and larger wealth face a rising rate of punitive taxation. Such a tax regime is a deterrent to respecting the process of income and wealth generation. Its a hypocrisy, particularly in the Indian civilization that likely is the only civilization in the present day that worship Mahalaxmi -- the Goddess of all wealth. Income Tax must only be a contribution towards governance and not a punishment for having generated more and more income.

A clear intention, by way of a policy announcement to bring down Income Tax rates to a FLAT 15% for everyone in five years, reducing progressively 3% tax each year is going to put India in a totally different orbit.

The root cause of black-money is intolerably high Income Tax rate. At the core every human being seeks growth and progress. High Income Tax rate do not deter the enterprising from making money, but only deter them from declaring how much they are making because the progressive Income Tax regime is disrespectful to the goal of wealth creation.

Soon as such a policy is announced, it will make the Discounted Cash Flow value of putting up new enterprises in India way more competitive than almost every other nation. If a tiny island as Singapore with frugal and limited resources could become the abode of Laxmi where capital continues to flow from the haven of Switzerland, then India with its endless human resources, every soil type, every mineral resource, a very large captive consumption market will be the haven. Not only we will create a compelling superior alternative to China in making India accepted as the world's next factory, we will also emerge rapidly as one of the most important intrepots and trading venue of this world.

Consumption Taxes: Excise and Sales Tax are effectively taxes on production and sales. Again there is a bad paradox here. Why should any philosophy of taxation penalise those who "produce"? There should be a unified Consumption Tax policy where there is no seggregation between Excise, Sales or Service Taxes. Anyone living in a family who consumes more than a fair share of the larger family's resources is looked down on and anyone who produces more is looked up to. Same way, once having straightened out the Income Tax regime where larger earners are respected, there is a need to have a progressive consumption tax regime.

For example, a Nano Car may have a 5% Consumption Tax, but say an Indigo may have a 10% tax and say a Tata Safari may have a 17% tax and say a mid-market sedan may have a 25% tax and say an entry level Mercedes may have a 35% tax and say a Land Rover may have a 50% tax and say going all the way to a Lamborghini it may have a 300% tax.

This thinking is not at all new. If Tobacco products have a very high rate of indirect taxation, the same logic be applied to each and everything. Necessities are untaxed or barely taxed. Conveniences are taxed more. Luxuries are taxed heavily and ostentatious indulgences are taxed punitively.

Same should apply for services. Visit to a General Physician be untaxed. Visit to a General Hospital be untaxed. But if anyone has to go to an expensive private sector hospital it may be taxed with heavier service taxes.

In the coming regime of GST, a single unified Consumption Tax regime is completely feasible.

Global Trade Taxation:  Anyone from the old Bombay Club squirming at the thought of low taxation regime bringing in more competitive manufacturing from overseas and ruining Indian industry is just plane wrong. Let everyone in the universe open more and more factories in India and create endless jobs and endless new products. However, if there is a progressive consumption tax for any sales done on-shore by any manufacturer, whether such a company is owned indirectly through portfolio holdings by FIIs or a much more clearly fully owned subsidiary of a global manufacturer, our nation will not be consuming incorrectly. The best manufacturers who can provide the best products will be available to our citizens. That would raise the consumer surplus in the hands of every microscopic economic agent. In such a regime it is entirely possible and likely that the hedonistic producers such as the Lamborghinis of the world may sell only a tiny portion of their Indian produce (yes why will they not open their factories in a nation that has one of the lowest income taxes and every other resource) on-shore and make very large exports.

The need to regulate what should be allowed to be produced in India and what should not be will be totally perfunctory thereon. A progressive Consumption Tax regime will automatically, by the forces of the market-place, align the production basket of every manufacturer and thus of the nation.

Import Duties: Progressive Import Duty structure be put in place. Raw materials such as minerals or commodities may have a nil or near nil import duty to facilitate the most competitive manufacturing. Any intermediate goods that have a value content of production over and above the absolute raw material should be taxed progressively. In a progressive Import Duty regime, anyone who indulges in screw driver assembly business by importing semi-knocked down kits will be unviable. White-collar smuggling that is passing through until now as creative business structuring will be unviable.

Say for example, if anyone wants to import any type of sand, if there is a claim that enough good sand is not available in India for making semi-conductors, let them import it at a very low or no import duty. But if someone is importing refined silica, it should happen at a higher import duty. If someone is importing any semi-conductors then it should happen at a rate of duty that rises more than the rate of value enhancement from refined silica to a semi-conductor. If someone imports a fully fabricated chip then it must happen at a progressively even higher import duty. The fear that such an import duty regime that will make DVD players or computer or laptops much more expensive compared what they are priced in the Global market is totally unfounded. I will explain why.

There is a tax arbitrage in such a progressive Import Duty structure, for every global manufacturer. The more value creation such global manufacturers do in India the more profits they will make by converting Silica into RAM chips on the shores of India! The power of incentives drives economics. The process of gubernatorial intervention drives economics crazy, on the other hand. Let a progressive Import Duty regime thus incentivize more and more value creation on-shore.

Yet when you notice the combined effect of such a progressive Import Duty structure with a Progressive Consumption tax structure, then a simple example will illustrate the power of this simplification.

Say, a manufacturer of electronic cameras such as Nikon that would have to put up a factory in India, were to choose between importing its circuitry and memory chips from Samsung's Taiwan facilities at a higher import duty in India or will be able to buy a similar quality chip from a Samsung that would manufacture the same chip in India at a much lower price.

In the same chain, if Nikon were to sell a camera of 8 megapixels on-shore to Indian consumers that likely qualifies at today's standards as a convenience good at say a progressive Consumption Tax of 20% but will be able to sell a 32 megapixels camera on-shore that qualifies at today's standards as a luxury at a progressive consumption tax of 40%, then we have setup the world's perfectly taxed super-factory called India Inc. Why? Isnt it clear that Nikon India will prefer to buy from Samsung India than from Samsung Taiwan and yet Nikon India will prefer to export out its ostentatious produces while being keen to sell the convenience produces in India. In all the scenarios the low flat Income Tax rate will be compelling for Nikon to not only manufacture the cameras it intends to sell within India, but also the cameras it wishes to sell everywhere else in the world, from its Indian factories! If jargon is necessary to convince the erudite and the scholarly and for the economists, then this is a simple and a very lucid illustration of how Producers' Surplus will also go up in India. 

A unified tax policy as this is arguing humbly to be able to raise both -- the Consumer Surplus as well as the Producers' surplus! 

Anti-Dumping Duties & Trade restrictions: With utmost humility Sires, I wish to submit that the persuasive skills of big business at influencing Gubernatorial decisions world-wide are far more effective than the skills of any single Government in convincing any other Government. Lets abandon the mind-set of managing Trade Treaties and Inter-Governmental pressures. The pressures of the market-place and particularly Free Trade are far more fair and persuasive.

To conclude, I wish you closely evaluate that our civilization has been raising the slogan of "Vasudhaivaya Kutumbakam" for too long. For a change, why do we not take the lead in demonstrating to the world that not only our civilization believes that the entire Vasudha (world) is one Kutumb (family) but we do have the courage, conviction and clarity to lead the change and set right the wheels of growth, progress and value creation for this single One World. By the time other nations that may come close to our level of sophistication and diversity catch up with this philosophy and begin to implement it, a few decade would be more than enough for our India to be propelled atop the economic accomplishments rampart.

I will refrain from consuming your precious time in enlisting the endless multiplier benefits such as a far faster GDP growth due to compliance in income disclosure, appropriate consumption, much larger investments etc. etc. in this letter since I have enumerated them at length in my prior open letters to you. This simplification of our entire tax policies will bring in a quantum leap on both the level of value creation as well as its valuation for India.

Let me get an India that leads the world in according the fair respect to those who produce, those who generate value and pushes back those who consume unfairly. At the core of any challenge, the solution that is best is actually the one that is simplest. I urge, India rises to the simplicity of "Satyam Shivam Sundaram". The truth is basic and thus beautiful.

Sincerely Yours,
With Love & Respect,
Sushil Kedia

Open Letter VI to Shri Narendra Modi: A Novel Sovereign Fund, the India super ETF

Shri Narendra Ji Modi
Prime Minister

Respected Modi Ji, 

India is a sovereign entity. We have wealth. Why should we not have an India Sovereign Fund? Why should we restrict our imagination only to how the West does some things? 

In answer to these two simple questions, here is a lucid solution:

1) Transfer each and every single share in every PSU, irrespective of whether any specific PSU is loss-making, profit-making, strategic or non strategic into the India Sovereign Exchange Traded Fund. 

2) An ETF is an open-ended fund, by definition. Liquidity to the units of such a fund are provided by market-makers. The more liquid the units of this fund will become in time, the more liquid an asset the Government of India will be sitting upon. By common-sense, the more liquid an asset is the more useful, portable and thus valuable it becomes. The Balance Sheet of the Government of India will be cleaner, more liquid and thus more effective in meeting many endless goals. 

3) If the Government of India will not participate regularly in buying and selling units of this Super ETF, then too, all kinds of investors and traders, wheather local or global, whether short term horizon seekers or long term value merchants, will participate. This creates an enormous investible basket and a new venue in financial markets for competitive capital allocation. Indirectly, the Government will have a liquid large pile of near cash with such a simple manouver. No need for going through intensely political, slow and often sensitive divestments that have sapped the momentum out of the reform process time and again. In a single stroke, display the readiness to disown the entire public sector. The conversion of all the holdings in the name of the President of India into an ETF is not divestment or disowning the PSU, but a preparation to do that in any proportion across the board in a diversified manner, continuously over time. A signal from the sovereign is good as the actions to come! 

4) Whenever markets are in euphoric extremes, the Government of India can readily encash its liquid holdings of the units of this India Super Fund or the India Sovereign ETF. Whenever markets are drowning, if appropriate and timely encashment cycles have been utilized in the prior periods, the various vehicles of the Government of India can buy into "cheap" prices of these units. Over time, a net net divestment cycle will be smooth, regular, without any innuendos and conundrums. 

5) Even if some PSUs may still not be listed, a professionally managed super-fund as this can cause listings, over time. 

6) Tax arbitrage be made available to those investors in the super-fund who would on liquidating the units of the fund collect shares of the underlying holdings in proportion instead of cash and continue to hold such underlying shares through the cumulative holding period of 1 year eligible for long term gains. The benefits of hedging on these individual shares be allowed too. Benefit of such a structure is that without increasing the floating stock of the highly valuable PSUs, contestable price discovery will continue. This will likely ensure a higher Valuation Band for the PSU companies over time, than would be if such a structuring is not offered. 

7) The decisions regarding when the Government of India liquidates any holdings of units in this Super Fund and when does the Government of India buys any units of the Super Fund be left to in the independent discretion of the Reserve Bank of India. Central Bankers that trade currencies world over are above any suspicions or allegations of Insider Trading. This should be good enough a reason for all to trust the Central Banker of our country in trading the holdings in PSUs purely based on its own macro assessments and its own estimates of the cash-flow needs on the Balance sheet of the nation. 

8) Let us seriously examine the possibility of deleveraging the Balance Sheet of our Nation with this move. With an initial listing of the ETF, on the average six months' price of the ETF holdings of the Government of India a transfer should be made to the Reserve Bank of India and an equal value of the outstanding bonds of the Government of India should be retired out. A far healthier balance sheet of India will likely only improve our rating, than otherwise. 

9) If such a large reduction in the Government debt comes by with this move, there will be a unique situation. Prices of Government Bonds would have moved up without throwing in any additional cash into the markets. Can interest rates therefore not come down and the risk of inflation in essentials will still not go up! If at all, this mechanism is exporting the inflation risk from consumables to asset markets! 

I urge, you delegate this simple thought process to each key stake-holder in Governance, for a close inspection. 

Sincerely yours, 
With respect & love,

Sushil Kedia