The memoirs of Parthasarathi Shome, former adviser to the Finance Minister of India, is titled Virtus in Arduis — virtue in perseverance — the Latin motto of his school Don Bosco in Chennai. It describes the rigorous research and multi-country experience that has gone into the making of a globally renowned tax expert. Shome built his reputation in policy and advisory areas through his stints in academia, the International Monetary Fund and his work with 50 governments.
I had the privilege of working with Shome in the Tax Administration Reforms Commission(TARC), set up in 2013 at the instance of the then Prime Minister with support from the Finance Minister. Shome was the chairman of TARC and I was one of its six members, drawn from both tax administration and business sectors. I had joined TARC as part-time member soon after retiring from Tata Consultancy Services as its Chief Financial Officer. Shome brought us all together in the quest to create an effective tax administration for India. He brought his international experience to the deliberations of this commission.
The IMF advantage
Shome had an exceptional academic record as a student in India and in the U.S. Manmohan Singh taught him International Finance in his Masters course at the Delhi School of Economics, “with studious preparation and absolute clarity.” What runs through the book is the affection Shome has for his teachers, both at school in India and universities abroad. His work in the early years at IMF gave him an extraordinary insight into the efficacy of tax measures and the political costs of implementation of these measures.
He put these ideas to work as he led teams at IMF to advise governments on what they needed to do in tax areas. As he writes, the IMF assists countries to construct an economic reform programme made up of macro-economic corrections and buttressed by structural policies in fiscal, monetary and exchange rate areas. Tax systems that he advised was part of this overall programme. The book describes his work in most countries of Latin America. His fluency in Spanish, which he learnt on the advice of his mentor at the IMF, stood him in good stead. He worked with Finance Ministers in each of these countries and his recommendations were mostly accepted. For his long involvement with tax policies in Brazil, the government conferred on him the ‘Commander of the Order of Southern Cross’, one of its highest awards. While his work was appreciated at the highest levels in governments, it was not always so at other levels. The general public resented the prescriptions of the IMF, as it had an impact on their daily life. The structural adjustments that the IMF recommended included changes in the indirect tax systems, affecting the common man. He describes an encounter in a shop in Venezuela where the manager refused to sell him anything after she realised he was part of the IMF team.
Foundation of VAT
Shome advised countries in Africa, Europe and Asia before returning to India to continue research activities at the National Institute of Public Finance and Policy (NIPFP). In this stint in the late 1990s, he chaired the first Centre-State Committee to suggest reform of the Central-State Tax. He was also adviser to Madhya Pradesh, Karnataka and West Bengal governments. At the invitation in 1995 of Arjun Sengupa, Member Secretary of the Planning Commission, he chaired the tax policy working group which gave him further insights. It is interesting to note that tax to GDP ratio in 1995-96 was 16.5% of which the Central government yielded 10.2%, States 5.7% and local governments 0.6%. Tax to GDP ratio remained almost at the same level for the year 2012-13, as we found out during the TARC deliberations. A modern country needed a much higher ratio. Subsequently, in 2000, he was the chairman of the 10th Five Year Plan Working Group on Tax policy and Administration and as part of its terms of reference, that group went into the possibility of introducing State level VAT.
The IMF had allowed Shome to retain his employment at IMF during his two-year stints in India, first in 1995 and then in 1999. However, at the request of Chidambaram in 2004, he joined him as adviser, thus putting an end to his long career at the IMF. During the next three years, he looked into the introduction and implementation of State level VAT.
One of the effective institutional mechanisms he had seen in Brazil was the Confederation of State level Finance Ministers called CONFAZ. Brazil, like India, had a federal set up and he found CONFAZ to be effective in getting agreement of State and Central Governments on any change to VAT structure. In 1995, when Dr. Shome was Director of NIPFP, he suggested the introduction of this coordination committee to Raja Chelliah who passed it on to Manmohan Singh, who was then the Finance Minister. Singh then chaired a meeting of State Finance Ministers in 1995 and this led to the creation of an Empowered Committee, to be managed by State Finance Ministers. This later led on to the formation of the GST Council.
While the contours had changed, Shome was instrumental in creating an institution suitable to the federal structure of India. Being adviser to the Finance Minister, he had a role in shaping budget proposals. Chidambaram also used to seek his opinion on many initiatives that he was contemplating. Some unpopular taxes also were formulated at that time — such as the Fringe Benefit Tax and Banking Cash Transaction Tax. He also looked into the introduction of the Direct Tax Code. I was the CFO of TCS and I had expressed my negative opinion on the Fringe Benefit Tax, a view I was to change later as a member of TARC. This stint gave him a ringside view of policy-making at the highest level, and also listen to the viewpoints of industry and tax payers. Subsequently he headed two Committees in 2012 — one on General Anti Avoidance Rules(GAAR) and the other on Retrospective Taxation. These two had been introduced amidst widespread criticism by the Finance Minister Pranab Mukherjee. GAAR regulations had to be tweaked, while a firm view had to be taken on ending the practice of retrospective amendments which in fact was formulated as a measure to get over the Supreme Court judgment in the Vodafone case.
Chidambaram and Manmohan Singh could not dissuade Shome from accepting the invitation from Her Majesty’s Revenue and Customs (HMRC) in the U.K. and he joined it as its Chief Economist in 2008.This assignment gave him an inside view of a major organisational change that had been introduced in the U.K. Shome also worked closely with a large multi-disciplinary team in the Knowledge, Analysis and Intelligence department which provided analytic support to determine the impact of current and proposed tax measures.
India’s concerns
His rich experience in working on missions and policy areas in IMF, in-depth knowledge of tax instruments, working in countries like Brazil, India and the U.K. and his research base moulded him into a top global expert on taxation. I watched him closely in TARC, as he led the team to come up with practical and path-breaking recommendations to create a modern, responsive and responsible tax administration system for India. The four-volume TARC report between June 2014 and February 2015 specifically warned the government against cherry picking among the recommendations. It wanted the government to implement the report in toto in order to transform the system. However, after the report was submitted to the Modi government, only some recommendations were implemented. Whether this perfunctory approach was because of politics, as TARC was set up by the UPA government, is an open question. A major effort by a highly competent team led by one of the top global experts has been ignored.
Shome’s memoir contains a lot of personal details. As he writes about the specific tasks he carried out in about 50 countries, we find out how this experience informed his career. A global Indian, Shome has published many books on taxation. This book knits all his work together to create a body of literature on the evolution of global taxation policies and practices.
Virtus in Arduis: I Did It My Way ; Parthasarathi Shome, Orient BlackSwan, ₹895.
