Investors want certainty and stability in the tax system
RBI governor Raghuram Rajan has called for a transparent and predictable tax regime. His words are well-timed, coming as they do just before the Budget exercise starts. Investors want certainty and stability in the tax system. Recently, the government dropped all past demands of minimum alternate tax on foreign portfolio investors. Earlier, it had decided not to challenge the Bombay High Court ruling that struck down the tax demand on Vodafone for an alleged transfer pricing irregularity. By removing ambiguity, the ruling helped resolve over two dozen similar transfer-pricing disputes. However, rather than letting out a knee-jerk case-by-case reaction, the government must put an end to festering tax disputes that, in turn, give rise to tax terrorism.
Tax reform will reduce disputes. The government must make tax laws simple, lower corporate tax rates and adopt the goods and services tax (GST) that will eliminate the cascading of taxes. It must also train officers in areas such as transfer pricing to curb aggressive audits. GoI has already promised to lower the corporate tax rate. Exemptions should be phased out. The retrenching of, say, special economic zones (SEZ) must not be sudden. While setting a deadline for exemptions, the government must ensure that existing investors don’t lose the benefits of already availed for tax breaks.
A unified market with GST will make India one big SEZ, raising the share of manufacturing. A zero-rate tax on exports will ensure that India doesn’t export any taxes. The government must also provide robust infrastructure, efficient administration and improve the regulatory environment for investors. Rajan’s point to create an enabling environment for businesses in India should make the government focus not just on tax, but on other reforms too.
