A stable government at the Centre, unfettered by conflicting ideologies, has understandably raised market expectations. Yet, as long as the international markets continue to pose a grim picture, India cannot be isolated from the global recession. The fiscal deficit has continued to mount. The Union budget to be announced by the new government on 6 July will need to reckon with these realities.
Having said that, it is still possible for the government to use tax and foreign direct investment (FDI) policies as a stimulus for recovery. Here are a few thoughts on the steps that could help the government revive the economy.
First, a huge amount of government money is locked up in tax litigation; according to recent news reports, this is anywhere between Rs65,000 crore and Rs150,000 crore. Much of this litigation has risen from high-pitched assessments of individual or company revenues. The pressure of not granting even rightful refunds and collecting tax from overblown assessments has now almost resulted in authorities window dressing tax revenues. We need to break away from this mould. At a time that businesses are starved for financial resources, having cash locked up in refunds serves no purpose.
Similarly, rampant tax litigation with multiple interpretations and a long timeline for resolution needs to become a thing of the past. Towards this end, there is a need for well-defined mandatory timelines for disposal of appeals, as well as an introduction of a mechanism for enabling resolution of tax disputes without having to undergo a long appeal process. Several suggestions, such as a national tax tribunal (NTT), have been made to the government in this regard; it is time many of these are implemented.
Second, there is an urgent need for the simplification of tax laws. With the continuation of the United Progressive Alliance (UPA) government, the efforts made over the last couple of years to evolve a new direct tax code will, hopefully, not go waste. The current law continues to have several ambiguities with regard to, say, the computation of profits accrued during government declared tax holidays.
There is also an unfinished agenda on many issues: the new Companies Bill, introduction of the goods and services tax (GST), clarification on taxation of limited liability partnerships (LLP). All of this needs to be put behind us.
Third, there is also a need to rethink tax laws which have been major irritants, without necessarily contributing to the exchequer. The fringe benefit tax, which taxes an employee’s perquisites, is one case in point. There is a need to relook the dividend distribution tax, the tax levied on a company, based on the dividend it pays investors, that is becoming a major cost.
Fourth, the India-Mauritius double tax avoidance treaty is one area where there is confusion between the policy arm of the government and the implementation arm. Government policy is meant to avoid double taxation from Mauritius, but the income-tax department doesn’t seem to keep this in mind. This sends wrong signals to foreign investors. In fact, a stable tax policy is an integral part of FDI policy.
The need now is to bring in more of FDI that will provide the finances critical to economic development. With a clear mandate from the electorate, it is now imperative that the government lives up to these high expectations.
Dinesh Kanabar is executive director and India leader of tax practice, PricewaterhouseCoopers. Comments are welcome at firstname.lastname@example.org