An illuminated “Make in India” logo being installed at Udyog Bhawan in New Delhi, Aug. 11. (Manvender Vashist/PTI)
The Indian government under Prime Minister Narendra Modi has committed to improve the country’s low rank in the ease of doing business, an index formulated by the World Bank. New Delhi is pushing forward a series of economic reforms aimed at improving India’s position to be among the top hundred nations. Right now the country is placed at a low 130th, poor reflection of how businesses view India in terms of stable policies, tax regimes and regulations, writes Siddharth Srivastava. – @Siliconeer #Siliconeer #narendramodi #narendramodi @namo #namo #businessfriendly #India
The ongoing reforms are in keeping with Modi’s “Make in India” vision to turn the country into a manufacturing hub that can compete with China. In this context, the government has managed to manoeuver towards a Goods and Services Tax (GST), one of the biggest reform measures when implemented, that seeks to subsume the complex and multiple imposition of indirect taxes into a single rate.
Last month, both the Houses of Parliament passed the 122nd Constitution Amendment Bill 2014 that will herald a single unified market across India. Some have called the passage of the GST Bill as India’s reverse BREXIT moment. It is expected that state assemblies will approve GST to turn the bill into law. Though the GST Bill in its current shape is seen as a bit of a mixed bag for certain segments, any reform of the complex tax structure as it exists today, will benefit all sectors by boosting the economy. Logistics and inter-state trading will become much more efficient and less time consuming. GST will root out harassment and corruption by excise inspectors at every level of the value chain.
However, despite the political commitment of the government, it is also true that businesses, especially overseas investors, continue to be cautious as there is a strong feeling that more needs to be done. One major concern is dealing with the bureaucracy, including a hostile income tax department, that is unable to shirk off it’s overbearing, high-handed functioning that harks back to India’s state-controlled socialist past, when the lowest government office bearer was colloquially referred as “mai-baap” (the all powerful). Then, there are big question marks about India’s sluggish and overburdened judicial system due to which litigation takes years, often decades, before any dispute, civil or criminal, is settled. An example of systemic failure is the bruising court battle that is being raged by over a dozen companies, including the Edinburg-based Cairn Energy and Vodafone, against controversial retrospective tax demands, the provisions for which was introduced in 2012, when the government was headed by former Prime Minister Manmohan Singh. In January, Modi spoke strongly against the retrospective tax.
“Retrospective tax is a matter of past. That chapter will not be opened again. We are ensuring that neither this government nor the future governments can open this chapter. Whosoever makes investment should know about the taxation system in the country over the next five years, 10 years, 15 years,” he said. However, despite the right noises, the fact remains that the government has not repealed the retrospective tax clause, which it could have easily done, given the majority the ruling party BJP enjoys in the Lok Sabha, which is the lower house of Parliament. Despite making placatory remarks, finance minister Arun Jaitley has repeatedly said the government cannot interfere with the administrative and judicial processes that will take their own course. This means entities that have been slapped notices by the IT-department, continue to struggle against an indifferent system. Last month, Cairn Energy said it has initiated an international arbitration to seek $5.6 billion in compensation from the Indian government in case a retrospective tax demand of Rs. 290.5 billion is not quashed.
More Action Needed
Though Modi government is pushing for far-reaching structural and economic changes, it has so far failed to bring about the much-needed administrative and judicial overhaul, crucial for businesses to prosper and invest. For instance, the IT-department and the judiciary are woefully understaffed and overburdened. This means that any redressal mechanism, for say an unjustified retrospective tax, takes years to unravel. Two to four years is the minimum time that the IT-department takes to decide on minor cases. If there are appeals, this can stretch to five to seven years. If the dispute heads to a court it can take more than a decade for a case to be finally decided, if one is lucky. In many instances, appellants, including companies, keep waiting for justice, in the course of which officers and judges retire. Sometimes, cases are passed from one generation to another. This is not the kind of conditions that any professionally managed entity would like to invest in heavily. The lopsided nature of Indian governance has engendered crony capitalists and political history sheeters who have learnt how to game the system to their advantage and are big votaries of status quo. They get away with committing breaches fully knowing that they will never be convicted for crimes that can range from embezzlement to non-payment of loans and even murder. Taking on such entrenched vested interests is the challenge that Modi faces.