India should carve its tax code in stoneArchive
BENJAMIN Franklin said the only things that were certain in life were death and taxes. Obviously he had never been to India. As any foreign investor knows, the one thing you can say about India’s tax regime is that it lacks any certainty at all. One minute a company thinks it has settled its bill, the next it is being hit up for billions in retroactive levies. If it is lucky, after an excruciatingly lengthy (and doubtless costly) sojourn in the courts, the threat evaporates. If not, it pays up — and vows never to invest in India again.
India has got itself into a terrible mess over taxes. Many of the problems are a hangover from previous administrations. The government of Narendra Modi likes to call them ‘legacy issues’. Whatever you call them, the fallout is damaging Mr Modi’s own reputation for getting things done. Far from cooling things down, Arun Jaitley, his finance minister, has sometimes poured oil on the fire. His aside that he could solve India’s irrigation problems with a one-time tax on global fund managers might be true. Equally, his remarks have sent foreign funds scrambling for the exits. The rupee is down to levels not seen since late 2013.
There are three areas of concern. One is that fund managers are suddenly being asked to pay the so-called minimum alternative tax, a levy introduced in the mid-1990s to ensure that domestic companies don’t get away scot-free. The MAT was never intended for foreign funds, but a 2012 ruling from one tax body opened the door to charging them. Instead of knocking that on the head, as he should have done, Mr Jaitley has stressed the tax authorities’ independence.
True, he has ruled out levying the tax after this April. But that leaves open the possibility of more than $6bn in back taxes. Retroactivity more generally is a big problem. Time and again, companies have been hit by retrospective tax demands. Overzealous tax officers, perhaps annoyed at how adept multinationals are at minimising their tax bill, are chancing their arm. The tax authorities are playing whack-a-mole. No sooner had some cases, including one affecting Vodafone, been settled in the courts, than they sent a summons to Edinburgh-based Cairn Energy for $1.6bn related to the reorganisation of a former Indian division.
Tax was in the news again this week when parliament’s upper house rejected a bill to introduce a unified national goods and services tax. The so-called GST has been 10 years in the making. Now it is being held hostage by a Congress party that once championed it. New Delhi, of course, is hardly the only capital where politics trumps sensible lawmaking. And some details of the GST have been rightly criticised, including a 1pc cross-state levy that makes it cheaper to import from abroad than from elsewhere in India. Still, the idea of a uniform tax is absolutely correct. India should pass a sensible version of the GST forthwith.
Thankfully, the government is aware of its tax problem. Arvind Subramanian, chief economic adviser, says India’s reputation as a place to invest has ‘been hurt very badly’. So what should be done? First, national priorities and those of the tax authorities need to meld. Too often, the government sets a policy only to have it undermined by a righteous tax official seeking his pound of flesh. The system needs to be rationalised so that the government and its tax bureaucracy pull in the same direction.
Second, it goes without saying that foreign and domestic companies, armed with the cleverest lawyers, do their utmost to pay as little tax as possible. Poor countries such as India have every right to levy reasonable levels of tax. In doing so, however, they should not resort to retroactivity. If tax laws were unduly lax in the past, so be it.
They can always be amended in future. India would do better to swallow the potential losses than to send out the signal that its regulations are subject to whim. The tax code should be simplified. The latest budget goes some way towards this by cutting corporate tax levels while closing loopholes and declaring war on black money. India’s goal should be fair taxes, consistently implemented.
Mr Jaitley may have seen the light. He has set up a high-level committee to look into the issue. If it acts swiftly and decisively, it could solve the MAT problem and put an end to retroactivity at a stroke. Its task is urgent. India must send out the message that its tax code is both rational and carved in stone.
Published in Dawn, Economic & Business, May 18th, 2015
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