Don't let the tail wag the dog: What Budget 2025 can do about India's growing tax overreach
tax overreach, such as the legally contentious retrospective taxation of Vodafone, is jeopardising India's growth story by deterring domestic and foreign investors. Coupled with regulatory hurdles, these measures undermine India's potential to emerge as the next global growth hub. In many cases, the challenge is so acute that enterprises and HNIs are relocating abroad or scaling down local manufacturing capacity to minimise interactions with regulators and tax authorities.
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Why, then, has India persisted with flawed policies and inefficient institutions over the past seven decades despite evidence of detrimental effects? The work of the 2024 Nobel Prize winners in economics — Daron Acemoglu and Simon Johnson, along with James A Robinson — offers insights into this predicament. They argue that India inherited colonial-era institutions, primarily designed for revenue extraction, and, regrettably, these frameworks were perpetuated after Independence. Over time, powerful groups have fortified these institutions, resisting reforms. When reforms are introduced, they tend to be incremental, designed to preserve the status quo rather than disrupt entrenched interests.
Worryingly, these outdated frameworks have shaped domestic institutions in a way that hinders or slows down the democratisation of power, even as socioeconomic conditions have improved over the decades. This raises a question: will the NDA government present a bold vision in the budget that showcases a new institutional framework to guide India toward its
