Undoing the damage

Shome panel underlines need for predictability and efficiency in tax law and administration

Shome panel underlines need for predictability and efficiency in tax law and administration

The recommendations of the Parthasarathi Shome committee on the controversial general anti-avoidance tax rules (GAAR) build on a premise few governments in India have acknowledged: India is a relatively high-cost economy to do business in compared to other emerging markets,both because of higher interest rates and outdated labour laws. In the absence of cheap capital or labour,therefore,the economy can ill afford to play around with its tax rules to create yet more hurdles for investors. The misplaced zeal to tweak tax laws to chase chimeras like the unearthing of black money has sometimes made fiscal provisions arbitrary. Worse,it has provided tax-haven-like advantages to those who could play the game. In this scenario,Budget 2012-13 stands out as Indias first budget that has had to be entirely rewritten within the year.

The Shome committee report makes it clear that what is needed is predictability in Indian tax laws. On the subject of non-resident taxation,it has made a clear distinction between tax avoidance and evasion,recommended postponement of the GAAR by three years and asked for abolition of the short-term capital gains tax from the securities market to make it immaterial whether an investor uses a tax haven or registers directly in the Indian market. The report is clear that in modern tax regimes,authorities cannot presume wrongdoing by the assessees and begin a sweeping probe into their affairs. They have to first build a strong case. In postponing GAAR,a powerful investigation tool for tax sleuths,the committee has reiterated its belief that taxmen do not yet have the requisite training to work it wisely. For instance,tax officials in India rarely work more than three to four years in tax-related work before they get transferred.

The committees recommendations herald significant changes that will create an impact only when the government implements them. Also,in the short term,it is unlikely that the flow of investments into the Indian economy will show a rapid upswing. The impact of the tax-related apprehensions unleashed by this years budget will take time to subside,and globally,money is scared to move to any destination where tax laws change fast. But the report provides a good base to announce a schedule for the implementation of the delayed Direct Tax Code,if not for the Goods and Services Tax as well.