A taxing problem
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A flurry of tax demands on multinational companies such as Vodafone, Shell and Nokia has stoked uncertainties in India's investment climate. Even if legitimate in the eyes of the tax department, the demands are particularly ill-timed. As the finance minister attempts to woo global capital, if one of the arms of his ministry signals that there is no policy certainty in India, it could undo the goodwill P. Chidambaram might have built. He must now get down to not merely undoing the damage that Pranab Mukherjee's finance ministry wreaked, but also that which is being caused in his own tenure. He must offer certainty of tax policy, promising that there will be no changes in letter and spirit, and no retrospective taxes or interpretations for tax demands, especially on foreign investors.
The tax department would serve India better if it focused on collecting taxes from Indian residents who evade them. The approach of the tax department appears to be to go after those providing correct details about their incomes and then twist the interpretation of the law to squeeze more money out of them. Foreigners who have stakes in India seem to be the easiest targets. The department has not pinpointed Indian companies that have not paid taxes or slapped big demands on them. Had the tax notices to the high-profile multinational companies been part of the demand on, say, a hundred companies, a few of which were foreign, it might have been possible to suggest that the tax administration was being cleaned up. The signal now being sent out, instead, is that capital inflows are being taxed. At a time when the current account deficit is the highest India has ever had, and foreign capital inflows are crucial to maintaining the value of the rupee and thus inflation in India, this is bad strategy. Unless the tax department is very clear that there has been a violation of the law as it existed when the income tax return was filed, the ministry should exercise great caution before making such demands.