Friday, August 31, 2007

Law Street (The Economic Times, August 2007)

Hi Readers

As always click here for reading the latest column on: A tax vision for global India.

For your reading pleasure, in case of any difficulties in accessing the above url, the copy is cut and pasted below.

Happy reading.

A tax vision for global India

Wishing you all a happy Independence Day, albeit belatedly. India has made considerable progress over the last sixty years, including far reaching progress as regards its tax policies. Gone are the days, when a tax rate of 90% plus, together with industrial licensing, import controls, high import tariffs dented the zeal to have a vision. Today, owing to liberalisation Indian entrepreneurs can dream and can also achieve their dreams. Yet, is there a need for further progress on the tax front? Zenobia aunty’s friends from across the world have pitched in to share their view of the progress they would like to see in the realm of taxation. Some of these views pertain to their own home country but apply equally to India or for that matter to any other democratic country. Let us begin with the United States.

The Tax Foundation is a US-based non-profit, non-partisan organisation, which helps create a momentum for US tax reforms. While, US may be a tax developed regime (or so we think), like any other democracy the concerns of its citizens on the tax front are very much the same as in India. The ten principles of sound tax policy set down by the Tax Foundation are: Transparency is a must; be neutral; maintain a broad base; keep it simple; stability matters; no retroactivity; keep tax burdens low; don’t inhibit trade; ensure an open process; state and local laws also matter and the same general principles must apply to them.

In its recent release the Tax Foundation has rightly remarked that the US has the second highest corporate tax rate in the OECD and is only one of the two countries that has not reduced its tax rates since 1994. Chris Atkins, senior tax counsel and co-author of this new study, cites the benefits of reducing the US corporate tax rate: A lower effective tax rate on new investments in the US would steer international investments to the US; US multinationals would feel less pressure to engage in corporate inversions and other forms of profit-shifting; US companies would be more likely to reinvest foreign earnings in US companies and lastly state governments would feel less pressure to offer special tax preferences and credits in their efforts to attract new international business investments. In short, the wake up call in the US is that even the US needs to keep up with international trends and to ensure a steady stream of investments which alone lead to progress and prosperity.

Today, while we pat ourselves on the back as regards India Inc’s acquisitions overseas, we should not forget that foreign direct investment is still needed in India and so are local investments. For this, we need to ensure that the ten principles of a good tax policy continue to exist in India or if found lacking are introduced in India. This means having stable tax policies — the recent brouhaha over the SEZ policy and retrospective tax amendments do not present a stable picture. The less said about the prolonged litigation that any taxpayer in India is exposed to, the better. As India is today a strong player in the global market place it cannot rely on archaic laws. Laws, including tax laws have to be progressive in nature. Tax costs do play a crucial role in determining the choice between India or for that matter, China, Mexico or even Philippines! Yes, competition is stiff out there and we need to survive.

Similarly, as Zenobia aunty may have hinted on occasions that for Indian multinationals, which are striding overseas, tax laws need to be made friendlier. She recalls reading in the newspaper that the tax authorities will closely examine various overseas acquisition deals. If required, the tax treaty provisions will be denied. Why are Indian companies structuring outbound investments via holding companies set up in favourable jurisdictions? One of the main reasons is that repatriation of foreign funds to India directly from the investee jurisdiction is tax inefficient. Dividends from a foreign subsidiary company when brought back to India are taxed at the steep rate of almost 34%. The solution is to use a holding company structure, dividends that flow into this holding company, which is situated in a favourable tax regime is not taxed or is taxed at a low rate. Such funds can then be used for further overseas expansions or acquisitions and not brought back to India at all.

Thus instead of taking a short term view, the Indian government should look for alternative solutions — perhaps a lower tax rate on foreign dividends or exemption of Indian tax on such dividends provided these funds are used for further investments in India, could be the right solution. India stands on the threshold of being a major global power; it is for us to collectively pitch for the right policy framework. This, after all is the true worth of being a citizen in a large democracy.

1 comment:

laughingwolf said...

very well thought out and presented, thank you