Recent economic reforms by the Indian government have signalled an increased focus on improving the business environment and a desire to spur foreign investment.
These reforms are well intended and welcomed by most.
By Dr Mukesh Aghi
Every country across the world is struggling to grapple with the crises due to COVID 19. Like all crises, this too presents an opportunity for pathbreaking reform, re-aligning priorities, and reconfiguring policies to address the economic slowdown and enable the revival of businesses. In order to achieve the objective of “human-centric development”, that the Prime Minister identified while addressing the USISPF Leadership Summit earlier this month,
A calibrated but a fresh approach is required to balance between welfare economics and leverage investment (both local and foreign).
Recent economic reforms by the Indian government have signalled an increased focus on improving the business environment and a desire to spur foreign investment. Investment drivers like relaxing FDI norms or the procedural compliance simplifications under the tax regimes, allows momentum to improve the business sentiment. A slew of measures for the agriculture sector including the recent Farm Bills clearly indicates that the current Government want to convert this pandemic/ crisis into an opportunity for farmers. These reforms are well intended and welcomed by most.
Yet there is much to be done. According to the World Bank’s annual report on the Ease of Doing Business (EODB), ‘Doing Business 2020: Comparing Business Regulations in 190 Economies’, India ranks 63rd out of 190 countries and has moved up by 14 spots this year. This jump is quite significant given that India’s rank in 2014 was 142. While this is a true reflection of the diligent efforts of Prime Minister Modi to improve India’s position in the global rankings, more is needed to create the jobs required to ensure the entire population of India is holistically benefitted.
Numerous economists have encouraged India in the direction of a phased plan to revive an economy that has visibly contracted. Phase I of providing a stimulus package is complete to the best of abilities of the government, but this begs the question of how phase II can be achieved without a drain on the country’s coffers. To that end, FDI can certainly be a very effective tool to tackle this economic crisis, as brilliantly demonstrated by Reliance (Jio and Retail).
It should be clear beyond any doubt that for India to achieve its development goals, foreign capital and technology will be critical. In a COVID world, there are many things that are not under the government’s control, such as the development of an effective vaccine or border tensions with our neighbours. However, what the government can easily control is the narrative on investor sentiment by enabling policies where the law is matched in both letter and spirit.
For example, the appearance that foreign firms do not face a level playing field with domestic competitors will need to be dealt with if they are to make India a preferred destination for foreign investments.
Tax laws and policymaking is another area, where positive action could go a long way. Businesses around the world prefer clear, transparent and predictable tax policy when deciding long-term investments. Any element of ambiguity around tax policy can discourage investment sentiment. India has to stop the frequent revisions in tax regimes and constant rollback of announcements as they have an adverse impact on investor sentiment.
Successful or amicable resolution of long-standing litigation will help the cause. The recent Vodafone case is a good example of precious years lost and the enormous adverse impact it had on foreign investments. Unfortunately, Vodafone is just one example. According to the 2018 Economic Survey, in March 2017 there were approximately 1.37 lakh direct tax cases and 1.45 lakh indirect tax cases under consideration by the Income Tax Appellate Tribunal, High courts and Supreme Court. Together, the claims for indirect and direct tax stuck in litigation by the quarter ending March 2017, amounted to nearly INR 7.58 lakh cr, over 4.7% of GDP. It is estimated that the success rate in the tax dispute is below 30%. We have seen there have been initiatives to make tax laws more adaptable and taxpayer-friendly, but the litmus test fails many times when these laws are translated into action. A much-ignored fact is that while all corporations may prefer to be conservative on their tax bills, they will always want to abide by the law of land for their long-term interest.
Efficient tax administration and efficient tax dispute resolution are two elements at the centre of ease of doing business in any country. In India, trends portray that the tax litigation process takes years to resolve. The delay in dispute resolution, costs involved, along with the increasing magnitude of cases calls for an efficient policy of tax dispute resolution by the government. Adopting some international best practices, settling long-standing tax litigations or arbitrations, moderating tax rates to reinforcing independence & fairness in the assessment proceedings along with putting an end to retrospective taxation. Prime Minister Modi has the unique opportunity to set his record on tax policy straight by taking advantage of the recent international arbitration tribunal decision on Vodafone case, by honouring the decision and providing closure to this case and others, like it, that was not his or the current Government’s making.
The Indian economy which is going through its lowest phase needs investor’s positivity and confidence. The COVID crises give us the opportunity to re-build a stronger economy. A good place to begin would be by creating a fair, predictable, and transparent tax policy.
(The author is the CEO & President of US- India Strategic Partnership Forum. Views expressed are personal.)