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Tax break

3 September 2012 By Jeff Glekin

The Indian economy needs reform urgently but fractious politics are holding back the nation. Under the circumstances, an expert panel’s recommendation to reverse investors’ tax uncertainly after this year’s budget is quite good news. The government should quickly accept the advice.

Back in March, the then finance minister, Pranab Mukherjee, spooked overseas investors with two announcements: a decision to override a Supreme Court ruling on a tax case in favour of UK-based telecom operator Vodafone and a punitive set of laws that would raise taxes on investments in the name of reducing tax avoidance. The fickle and hostile policy risked making India a no-go zone for all but the most intrepid foreign capitalists.

Since then, Mukherjee has been kicked upstairs to the ceremonial role of President and both the new Finance Minister, P. Chidambaram and the prime minister, Manmohan Singh, have made no secret of their desire to overturn Mukherjee’s mess.

New Delhi has a habit of over-promising on reforms, but so far so good. A panel of experts was set up following Mukherjee’s promotion which has come back in unusually quick time with recommendations that would delay implementation of the anti-avoidance laws for another three years – and when they are implemented excluding foreign investors in securities from the short-term capital gains tax of 15 percent on overseas investments.

The government now needs to act with even more speed and accept the proposals. The finance minister might even go the whole hog and call off the Vodafone case too. These steps would make the route for foreign investors into India less rocky, but ultimately investors want returns as well as tax certainty.

That will be harder. While the government’s political opponents don’t care much either way about Mukherjee’s tax mess, fixing the mess he made of the public finances and pushing forward with the economic reforms he failed to champion will take more political capital than Singh and Chidambaram appear to have right now.

 

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