Indian budget has a global dimension

Responding to the strident criticisms of his budget proposals for introduction of retrospective effect to tax law changes going back to 1962, the finance minister has now stated that tax claims will not be applicable to and tax claims be made in cases where final tax settlements have been made already.

Besides, the finance minister clarified that tax law changes proposed in the budget will not override double taxation avoidance treaties already concluded with 82 countries. These therefore invalidate fears that many of the investments made under the shelter of these double taxation avoidance treaties will come under tax claims.

Basically the finance minister’s announcements allay fears of any backdated tax claims or re-working of the tax liabilities already settled. However, for future the tax law changes will be applicable.

Finance minister has also deferred the date of implementation of the proposed general rules for avoidance of tax, which has come to be known as general anti-avoidance rule. Investors from all over the world had asked for deferment of GAAR for a year at least.

A tax on unbranded jewelry, which had been protested by small goldsmiths all overt the country, has also been withdrawn.

The global reaction to finance minister Pranab Mukherjee’s budget proposals this year indicated the measure of the stake that global investors have now developed in India. In course of the reform years, India had opened up the scope of foreign direct investment in the country and India has one of the most liberal FDI regime. Fully subsidiaries are now allowed in most areas, excepting financial sector entities like insurance or pension funds.

Secondary market investments have also been opened to foreign financial institutions. These funds have invested large amounts in Indian stocks over the years. Most of such investments had flown from Mauritius which has the most comprehensive and beneficial double taxation avoidance treaty with India.

The finance minister’s clarification that tax law changes would not override existing double taxation avoidance agreements would now reassure the foreign institutional investors about future tax claims on their capital gains in India. The removal of this uncertainty will help rebuild their confidence in India as a future investment destiny.

It is not yet clear how these announcements will position the contentious and high profile tax dispute the Indian tax department and British telecom major, Vodafone. The exact implications of these changes on the Vodafone case will depend on the final details and wording of the fresh finance bill. However, it looks as though that following these changes the Vodafone case may not be pursued any more.

After all, at stake are much more larger issues than a tax claim of Rs 11,000 crore on a company. The adverse tax law changes had affected fresh flow of overseas funds into India. This affected the stock market and also the rupee exchange rate, among other things. Of course, the worsening global situation had also contributed to the fall in funds flow.

Whatever was the exact result, the proposed changes in tax laws had an arbitrary edge which unnerved the investor sentiment: it sounded as though nothing should matter or stand excepting that of the tax department. The changes now announced goes to an extent in removing that fear. However, it can still be argued that all this shock treatment was unnecessary to begin with.

In fact, the budget as placed by Mukherjee had an air of the 1980s, when  Mukherjee had first placed a budget. In 1982, when he placed his budget, India was an altogether different place from what it is in 2012. In 1982, India was a closed economy with little exposure to the world. FDI had been deliberately curtailed from an earlier liberal regime to be restricted to only a few areas.

Even then, FDI was allowed with cap on overseas holding. One after another, foreign companies were forced to dilute their overseas holding and ICI, ITC, CESC, Siemens, Hindustan Lever and name any company, had to bring down their overseas shareholding. Foreign Exchange Regulation Act with its often draconian implementation had created scare about foreign exchange in possession of individuals. The global economy’s interests had dwindled in India.

In contrast, India is now rated one of the top investment destinations by leading investment banks. The share of trade in India’s gross domestic product now stands around 35 per cent, which was less than 10 per cent earlier. Above all, India has grown a stake in the global economy. Unlike even a decade back, Indian companies are now global players. Their investments abroad are rising and they have global aspirations.

India cannot act unilaterally today, without vitally harming its global interests. Any changes in the laws and regulations in India will have to be examined now from its global impact. That is. What other countries may or may not do in retaliation to Indian entities on their soil or the interests of Indian entities the world over. The global protests that we have seen against the proposals for Indian tax law changes should be a lesson. We should not think decisions can be taken in isolation.
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