It was John Maynard Keynes who said, "practical men, who believe themselves to be quite free from any intellectual influences, are usually the slaves of some defunct economist...soon or late, it is ideas, not vested interests, who are dangerous for good or evil."

Whether this dictum is true or not, it certainly is not valid in the case of taxes. Surely, vested interests have played a significant role in shaping the tax policies in seeking and securing exemptions, preferences and concessions and thereby, complicating the tax systems and making them business unfriendly.

Indeed, in India, a fertile ground for their operation was created by the requirements of planning, pursuit of multiple objectives and discriminatory taxation required by them.

Taxes, like death, are inevitable, but they necessarily involve costs. These are the collection cost to the government, compliance cost to the taxpayers and cost of distortions to the economy.

The effort should be to raise the required revenues by minimising these costs. A growth-oriented tax system should focus on minimising compliance costs and resource distortions created by the tax system. Therefore, the best practice approach to tax policy is to broaden the base, levy low and less differentiated rates and keep the tax system simple and transparent.

It is also suggested that taxes should be on incomes and consumption rather than transactions and turnovers. The suggestion is also that the growth-oriented tax system should reduce the cost of operating in the formal sector and increase the cost of operating in the informal sector.

Unfortunately, in the hurly-burly world of politics, such noble considerations hardly find a place and most tax administrations in developing countries are insensitive to them.

According to the recent publication by the World Bank, "Paying Taxes 2008: The Global Picture," the Indian tax system is one of the most unfriendly to businesses in the world.

India ranks at 165 among the 178 countries and among the South Asian countries, it is the lowest (see the table).

This should really be of concern to policymakers and administrators in India if they have a developmental concern. But this has hardly raised any notice. The real question is whether the Indian tax system is really that bad or is it another advocacy by businesses or simply a sensational finding which merely deserves to be ignored.

The World Bank uses a simple methodology. It takes a standard modest-sized firm in every country and ranks the countries on the basis of three factors, namely, the number of taxes paid, the time taken to pay and total tax rate of all taxes paid by the company.

The study includes all taxes - on income, consumption and capital taxes levied by all levels of government. The selection of the "representative" firm and technical data required for the analysis are provided by the PricewaterhouseCoopers.

Does the indicator really represent development orientation in tax policy? A close look at the methodology raises serious reservations on the relevance of the measure altogether.

First, in choosing the case study company, a number of judgements are involved. The entire analysis is based on the private data compiled by the company and not on data available in the public domain and there are serious questions of reliability.

Secondly, the very fact of choosing a consulting firm with known views as a partner should raise eyebrows. The argument that the same firm is used to collect the information everywhere and the biases, if any, would be random is simplistic. There is scope for using judgements and this brings in serious questions of comparability. The measure neither calculates the compliance cost nor the distortionary cost.

Doubts can also be expressed on the three variables chosen to determine the rankings. Surely, the number of taxes creates a nuisance value but is it such a major issue to firms? The time taken to comply with the tax in the study includes preparatory time, filing time and payment time. But the lower time taken is not the only factor determining the compliance cost.

Further, one can reduce the time taken to comply with the tax by paying bribes. There are serious problems with taking the total tax rate measure. It is measured as the ratio of each of the taxes paid to profit before tax of the company and aggregated for all taxes.

Thus, the ratio of customs, excises, sales taxes, property taxes, individual income taxes and corporate profit taxes to the profit of the company is taken as the total tax rate. This comes from the philosophy that tax is an evil and imposes only a burden and not a means of providing generalised externalities.

The question is, are the taxes levied merely to impose a burden or to finance externalities? Besides, the firm itself does not pay all taxes; it merely collects them for the government, be it a sales tax or income tax deducted at source. This study is yet another case of the World Bank trying hard to bring down its own credibility!

All this, however, does not negate the fact that the Indian tax system has significant compliance and distortionary costs and the tax departments will have to brace themselves to remove them to impart development orientation.

The introduction of Goods and Services Tax will be important, but reform does not have to wait for that. Clearly, there is a case for merging a number of state taxes such as entertainment tax, electricity duty, passengers and goods tax, entry taxes and luxury taxes on hotels with the VAT.

Similarly the central government can do away with taxes like security and commodity transaction taxes and cash withdrawal tax which increase the transaction costs of conducting businesses and hinder the development of the markets.

Most of all, the tax policy makers and administrators will have to change their mindsets and show greater sensitiveness to impart growth orientation.

The author is director, NIPFP