India assures foreign investors of a modern tax regime

Washington, April 17
India's Finance Minister Arun Jaitley has assured foreign investors that the government of Prime Minister Narendra Modi was working on a more modern tax regime as part of ongoing reforms to increase investment and reduce regulations to realise double-digit growth.

“In order to realise double-digit growth we need to undertake a number of reforms to increase investment and reduce burdensome regulations. Key among them are taxes,” Jaitley said in a speech at the Peterson Institute for International Economics here.

Spelling out a tax vision for India at the leading think tank on international economic issues, Jaitley said he believed that with the reforms underway in India, “we are well on our way to having one of the more modern tax systems in the world.”

Noting that India, “one of the bright spots in the economy”, is attracting the attention of investors and policy-makers around the world because of its rising growth prospects, he acknowledged investors' concerns about tax related issues.

Outlining various reforms undertaken by the Modi government, Jaitley said, “Fundamentally we have restored faith in government and its ability to push the Indian economy toward the path of sustained double-digit growth.”

Spelling out his vision of a modern 21st century tax system for India, Jaitley said the Indian Parliament will pass a bill in the coming three weeks to implement Goods and Services Tax (GST), a consumption-based value-added tax.

It would, he said, create a broad tax base, strengthen revenues going forward, increase the tax-GDP ratio, promote transparency, reduce corruption and go toward creating an Indian common market because it will replace a number of state-levied taxes.

India’s direct tax system needs to catch up with the modern GST system, said Jaitley noting, “Currently we have in some ways the worst of both worlds: high marginal corporate taxes (35 percent) but low effective collection (22 percent).”

“We create the perception of a high tax country and yet do not collect commensurate taxes,” he said. “We need to change this to promote investment and growth. At the same time we need to create incentives for savings.”

A long standing demand of the US financial services industry, for allowing foreign investments in alternative investment fund (AIF) structured has been introduced in this year’s Budget, he said.

To simplify procedures for domestic companies to attract foreign investments, the budget does away with the distinction between foreign portfolio investments (FPI) and foreign direct investments (FDI), and replace the separate 'carve-outs', Jaitley said.

“This move is expected to attract more portfolio flows in the near to medium term in debt as well as equities,” he said.

“To promote offshore funds, it has been proposed that the activity carried out through an eligible fund manager located in India shall not constitute a business connection for being taxed in India.”

This clarification will help in relocation of fund managers in India, from Singapore and other such destinations, he said.

Turning to foreign investors’ “concerns about retrospective taxation, tax harassment, unpredictability and arbitrariness in tax administration,” Jaitley held out an assurance “that we are absolutely committed to a transparent and predictable tax regime.”

“There will be no retrospective actions and we will see taxpayers as partners not as potential hostages or victims,” he declared.

(Arun Kumar can be contacted at [email protected])