Modi Government's tax performance

The Modi government has completed its two years in office and it is not surprising that their performance is being measured and tested against the various promises they made and assurances that were given over the last 24 months.  

Tax, I would say, is one area in which the government started with a legacy that represented a perception, and not just from international investors' point of view, of being difficult and lacking in some basic principles.

In this context, the achievements in a short span of 24 months, almost feels like manna. Though it is clearly too soon to call it a victory, the very fact that businesses do not shudder anymore at the sound of tax or the taxman, is an achievement to be proud of.  

The government inherited two issues that had the potential of snowballing and making the tag of 'tax terrorism stick'. One was the attempt to tax share premiums and the other was the sudden realization that FIIs were liable to minimum alternate tax (MAT).  In what was almost a first, the government accepted the ruling of the Bombay High Court on the share premium issue and did not appeal to the Supreme Court. On the issue of MAT, it went by the recommendations of an independent panel rather than taking the route of prolonged litigation. Both moves were equally bold, which otherwise could have yielded the government handsome dividends in the form of tax collections. But it was pragmatism and tenacity that prevailed with the final objective of providing clarity.  

Consistency is often the hardest attributes for any government to score on, and perhaps one where more could have been done. Yet, it would be unfair to ignore the efforts. The appointment of the Justice Easwar Committee to recommend streamlining of redundant and potentially litigative provisions of the law was one such effort. What is even more commendable is that the government gave effect to many of these in the Budget 2016-17. Other measures worth appreciating include the amnesty provided on demands arising from retrospective amendments, or the swift implementation of some of the recommendations of the Narayana Murthy Report on taxation of PE funds, appreciation for the need of pass through for real estate investment trusts (REITs) and infrastructure investment trust (InVITs); and the exemption of dividend distribution tax. I strongly feel that a flash in the pan approach would not have helped, and it is only the persistent desire to demonstrate consistency that has led one to believe that the regime is truly moving away from being adversarial.  

It has also been gratuitous for the government that the international narrative has changed so sharply in the last few months. Transparency, substance over form, prevention of (tax) abusive structures and the likes are now common place in any tax policy conversation. Governments, across the world, are competing for tax dollars like never before, and the very same incentives and shelters that were once marketed by the state to attract investment are being attacked.  The discourse in India has been no different, and (almost) everyone knew that the party of treaty shopping had to come to an end. Investors were keen to know the new rules of the game and if they have enough room to learn the ropes. While the jury is still out on the changes brought about to the India Mauritius Tax Treaty, there is little or no ambiguity on what is in store.  The writing on the wall is clear, and it is time to set one's house in order and an investor now knows the cost of doing business in India.  It is perhaps this attempt at certainty that even the markets have appreciated judging from the less than violent reactions.

The agenda is far from over, in fact, the process has just begun.  There are some systemic changes required in the manner in which our tax systems are administered. That, however, seems unlikely to be on the agenda of this government or the next.  But unless this very change takes centre stage and precedence in the minds of our leaders, the adage that no country has taxed itself to prosperity will be lost on us.  The complexities, uncertainties and the  pace of change around us only mean that global and national tax policy also need to  evolve.  At least for the remaining tenure of this government, there must be constant reminders that unless we see more clarity and certainty consistently, the tide can easily reverse.

The writer is, Partner Direct Tax at PwC