Friday, May 08, 2015

Tax terrorism has returned in India, warns American centre-right think-tank expert

By Our Representative
The American Enterprise Institute for Public Policy Research (AEI), a center-right think tank based in Washington, DC, has warned that tax terrorism has returned in India. AEI's resident fellow Sadanand Dhume, in a strongly-worded commentary in the "Wall Street Journal" (April 7), says, the Narendra Modi government needs to immediately "stop sending mixed messages about its taxation policy" in order to attract investment.
The think tank wonders, "Finance Minister Arun Jaitley needs to decide: Is India to be a magnet for investment, or is it to squeeze every last rupee out of its private companies?", even as suspecting that a "a clutch of finance-ministry bureaucrats" are seeking to derail Modi’s grand plan to remake India’s economy."
"Recent damage to the government’s reputation—among both investors and ordinary citizens—suggests tax officials are on a collision course with the politicians they ostensibly serve. Unless resolved, the lack of clarity in the government’s approach to taxation risks undoing good work in other areas of the economy", Dhume says
He adds, "Speak with businessmen and reform-minded officials in India and a consistent concern will emerge: Tax authorities have brought a wrecking ball to Mr. Modi’s economic party."
Dhume bases his views on the manner in which in March the tax department used India’s "notorious retroactive tax law" to demand $3.3 billion from Cairn India, a subsidiary of Britain’s Vedanta Resources, for transactions dating back to 2007. 
At the same time, he adds, "foreign institutional investors began receiving notices to cough up a so-called Minimum Alternate Tax, which historically had only applied to domestic companies."
"Finance Minister Arun Jaitley declared that the demands could help the government raise $6.4 billion, before backing off amid signs of a stampede away from the stock market", Dhume says.
He adds, "Not content with spooking investors, officials have also proposed that ordinary Indians subject their foreign travel to the tax man’s tender scrutiny. They apparently believe India’s fiscal deficit can be bridged—and wealthy tax evaders snared—by quizzing middle class grandmothers on how much they spend while visiting their grandkids in Europe or the US."
"The government is also reconsidering the controversial new travel-reporting requirements, which kicked up a firestorm of protest on Twitter. Instead Mr. Jaitley has promised to radically simplify income-tax forms", Dhume notes.
"In the absence of philosophical clarity these steps risk appearing piecemeal rather than part of a coherent pattern. Inexplicably, the government has failed to repeal the 2012 retroactive tax law, arguably the single most damaging piece of economic legislation passed since India embarked upon liberalization in 1991", Dhume underlines.
"If the government is serious about fixing this problem, it needs to make up its mind. Is India’s main objective to become a magnet for investment, or is it to squeeze every last rupee out of private companies?", he asks.

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