Belated, but a balm indeed

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There are two types of reforms. One, that is deliberately planned with a distinct outcome in mind. Two, that are undertaken by compulsion in response to external exigencies. The Centre’s decision to scrap retrospective taxation of indirect transfer of Indian assets belongs to the second category. It is a belated step but in the right direction. While it might mean a temporary loss in revenue from Vodafone and Cairn Energy for the government that is already under fiscal stress, it can pave the way for greater good in future.

Overnight, the decision removes the nagging spectre from the minds of prospective foreign investors about the ease of doing business in India. The Vodafone and Cairns Energy episode were watched by investors all over the world and the crisis that both spawned did not send the right signals among those who might consider putting their dollars on the Indian soil. FDI is not portfolio investment which can be withdrawn at the click of a button. FDI goes into the creation of tangible, and often immoveable assets, that cannot be freely moved out of the country. The ultimate proof of the trust any investor reposes in a country is by committing FDI to it.

Increased FDI can bring in a lot of revenue for the government in future apart from giving jobs to many, boosting GDP and causing all-round happiness. The amendment to the Income Tax Act will not only save the government embarrassment over the Cairns Energy step of but will also inject more optimism about the country among all categories of investors. A few critics have said that the Centre’s decision to step back amounts to surrendering the right to tax. But the point to note is that retrospective taxation before a certain year has been abandoned and not prospective tax. Retrospective tax could also mean a tax raj. Tax-friendliness is one of the hallmarks of any modern government.