India's new government promises low and stable tax regime for economic revival

[July 25, 2014]  By Rajesh Kumar Singh and Manoj Kumar

NEW DELHI (Reuters) - India's new government pledged on Friday to pursue a low, stable and simple tax regime as it looks to win back investor confidence and spur economic activity, both of which have nosedived due to mounting tax disputes.

A struggle to raise revenues in a sluggish economy and the pressure to narrow the fiscal deficit to avoid a "junk" sovereign credit rating had forced the previous administration to aggressively collect taxes from companies.

Although the drive produced only insignificant increases in tax receipts, it swelled the total amount of taxes tied up in disputes and litigation to 4 trillion rupees ($66.6 billion) and dented corporate sentiment.

Finance Minister Arun Jaitley said the government would shun that approach and instead focus on smoother and investor-friendly tax policy to boost industrial activity and generate higher revenues.

"We are interested in creating a situation where...we revive that sentiment back," he told parliament. "My approach has been that we try and resolve disputes. We try and end arbitrariness. We try and give as much relief to the vulnerable as possible."
 

But it remains to be seen how Jaitley will proceed as two successive years of sub-5 percent growth have hit tax revenues, making it tougher to deliver on his promise to cut the fiscal gap to a seven-year low of 4.1 percent of GDP this year.

Customs and factory gate duty receipts recorded an annual fall in the first quarter of the current fiscal year, increasing the government's reliance on non-tax receipts.

Jaitley, separately, told lawmakers that the government would sell stakes during this fiscal year in Steel Authority of India <SAIL.NS> Rashtriya Ispat Nigam Ltd and Hindustan Aeronautics to bolster revenues.

RETROSPECTIVE TAX LAW

High-profile tax enforcement actions against global companies, including Royal Dutch Shell Plc, Vodafone Group Plc and Nokia Oyj have contributed to an image of India as a country that pursues "tax terrorism".

Prime Minister Narendra Modi has vowed to shed that tag by resolving pending disputes and reforming the tax administration as part of his plan to pull Asia's third-largest economy out of the longest spell of sub-par growth in a quarter-century.

While Jaitley's maiden budget this month contained several measures that sought to minimize tax litigation, it did not scrap the retrospective amendment of laws on indirect transfers.

Corporates have long pleaded with the government to annul the amendment, introduced in 2012 to reopen a tax dispute worth more than $2 billion with Vodafone after the Supreme Court had ruled in favor of the British mobile operator.

Analysts see that move as an unwelcome defining moment in India's relationship with multinationals, which slowed foreign investments.

Jaitley assured investors the government would not use that amendment to create new liabilities, but added pending disputes arising out of the legislation would be settled by courts.

"I have allowed the judicial process to sort out the past and for the future we won't allow this problem to take place in India," he said. Jaitley also promised to clear the air on implementation of the controversial rules on tax avoidance introduced by the previous government, which were deferred by two years. He did not give a timeline for the decision.

Introduced in 2012, the General Anti-Avoidance Rules (GAAR), were aimed at companies routing money through tax havens such as Mauritius, but implementation was delayed after an uproar from investors who feared harassment from tax authorities.

The former lawyer defended his decision to extend excise duty cuts for cars and other consumer goods until the end of this year and give tax breaks for individual taxpayers, saying the move would perk up demand and help an economic rebound.

"Put more money in the hands of average citizens so that his spending also increases and this larger economic activity will then lead to an enhancement of the growth rate itself," he said.
 

Two years of near double-digit inflation, combined with faltering growth and stagnating wages have crimped India's domestic-demand driven growth story. ($=60.09 Indian rupees)

(Writing by Rajesh Kumar Singh; Editing by Ron Popeski)

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