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Retrospective taxation hurting business environment: Damodaran Panel

Terming retrospective taxation a 'significant disincentive' for entities wishing to do business in India, a government-appointed panel has suggested a string of legal, administrative and regulatory reforms to make the country a better and easier place for doing business.
The panel has also suggested simpler drafting of rules to avoid leaving room for interpretations, while recommending greater autonomy to regulators, transparency in selection of heads for regulatory bodies, incentives for states undertaking key reforms and faster resolution of disputes through arbitration mechanism and consent settlements.

In its 77-page report for reforming the regulatory environment for doing business in India, former Sebi chairman M Damodaran-headed expert panel said that 'death and taxes are equally undesirable aspects of human life', but even death is 'never retrospective'.
'Retrospective taxation has the undesirable effect of creating major uncertainties in the business environment and constituting a significant disincentive for persons wishing to do business in India.

'While the legal powers of a government extend to giving retrospective effect to taxation proposals, it might not pass the test of certainty and continuity.

'This is a major area where improvements should be attempted sooner rather than later since business cannot take corrective action retrospectively,' said the report, which has been submitted to the Ministry of Corporate Affairs.
The issue of retrospective taxation created a major controversy after UK-based global telecom giant Vodafone was asked to pay out a significant amount as taxes through a retrospective amendment to taxation laws pursuant to a Supreme Court order rejecting the government's tax demand from the company.

The government later offered a conciliation with Vodafone on the matter.The Damodaran panel, which was set up in August last year after India was ranked very low at 132nd position in World Bank's ease of doing business list among total 183 countries, has made as many as 20 recommendations. These are classified in five broad categories -- legal reforms, regulatory architecture, boosting efficacy of regulatory process, enabling MSMEs, and addressing state level issues.

'If all you have is a hammer, everything looks like a nail! Such are the concerns relating to raising economic growth that everything in the business environment seems to be a candidate for reforms,' Damodaran said in the report.He observed that 'the plethora of laws and regulation' in India has failed to keep pace with time.

'The committee also observed that a large part of problem emanates from the way the appointments in the regulatory agencies, and also the organisational structure, are made and held,' he said, while suggesting infusion of professionalism through right selection and capacity building.

Damodaran said: 'The committee also felt that the use of information technology (IT) can be one possible solution wherever information asymmetry adversely impacts the regulatory environment. More effective use of IT can address multiple problems such as access to correct information, exchange of best practices and so on.'

Stressing the need for an easier set of regulations for micro, small and medium enterprises, the panel said the large enterprises may have the wherewithal to deal with the complex business environment, but a greater coordination amongst ministries and policymakers is required
for MSMEs.
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