Monday?s blowout in the stock market was definitely not triggered by just one event. There is enough gunpowder lying around in the shape of policy delays in economic issues, uncertainty of tenure of the government, the problems in bailing out Greece and, of course, the string of weak corporate results, each of which is good to send the markets reeling. Since the India-Mauritius tax treaty is a smoking gun at all times, some pretty superficial reports were all it needed to get this explosive cocktail going. Surprisingly, despite the string of bad news, the volatility index?India Vix of the NSE, a good indicator of how stormy the investors expect the markets to be?has not worsened of late. On Tuesday, it was trading at 21.31, about the same level as it had been at for the last two months. But to ensure that the cocktail of bad news does not get out of hand, the finance ministry should start with some things only it can fix and needs no other help to put through. This entails moving to a residence-based system of taxation instead of the source-based taxation that we currently deploy. In other words, this will mean that no foreign investor will be taxed in India while all domestic investors will be taxed. The foreigners will get taxed in their country for the income they generate from here. DTC, therefore, is the right move.
If this sounds like favouring foreigners at the expense of locals, remember this is what we already offer all investors who come in through the Mauritius and Singapore routes. Government of India statistics show that 52% of our foreign investment comes through these countries. So, extending the principle will only mean that the current advantage that these two countries enjoy will be killed with this move, without the tortuous course of having to renegotiate treaties that will take several years to sort out. The residence-based tax system has already been recommended by the UK Sinha-led committee under the current finance minister. So, Pranab Mukherjee should have no problems in owning up the conclusions. It is also worth remembering that the OECD countries, as a matter of policy, support the system of residence-based taxation. These are also the majority of countries from where India gets its foreign investment. This will essentially require us to calibrate our tax policies with the OECD countries. There will, of course, be attendant problems in the process, like dealing with tax havens, but then dealing with those is essentially a battle that any tax jurisdiction has to fight.
