Saturday, April 07, 2007


The impact of tax competition is circling the globe. This time, it has reached India where the economic growth is moving at an accelerated pace. According to international reports India suffers from a low credibility of institutional framework multiplied by rigid investment environment marred by government control, limiting rules on FDI, complex entry rules, tight restrictions on capital transaction and credit operations and restrictions on joint-ventures.

Financial Express reports that government is very unlikely to turn Mumbai into an international financial center (IFC) despite the report issued by executive committee concluding that far reaching financial reforms are neccessary for liberalizing the investment environment for domestic and international investors. One of the conclusions of the committee is that financial services in the city should not be supported by tax incentives but by a general regime of uniformly low marginal tax rates applied universally accross the board with as few tax incentives, exemptions and exceptions as possible.

Clearer tax policies and simpler tax regime are neccessary for a strong capacity of the financial sector to absorb its full-fledged potentials. Complex and roughly complicated tax regime surrounded by tax exemptions and tax exceptions increases both, (a) the compliance costs and (b) the time which businesses consume on searching how to avoid paying taxes. The measure effect goes in a direction in which businesses spent hours and days on fulfilling tax returns whereas they could spend it on strategic work and service operations to reached the wanted market goals.

There is many belly embodiments in India's financial tax code. There is, for example, a unique Securities Transaction Tax (STT) which businesses have to pay when they sell or buy a security of another company. The overall effect of degraded tax regime is seen in high effective taxation, forcing businesses to leave considered investment in the future as cascading taxes and duties reduce their capacity to fully absorb the innovative potentials and capacity underscored by a punitive tax regime. Securities Transaction tax is leaving a damaging impact. In recent decades, India has rapidly increased its trade and financial integration with the rest of the world. As this process continues, companies wishing to compete internationally in terms of ownership of foreign companies, are directly punished by this particular tax which undermines both; overall efficiency and competitiveness.

Numbers show that India's tax rates are moderate. Top corporate tax rate is 33 percent plus 10 percent surcharge on corporate profits. Other taxes included property tax, dividend tax and tax on insurance contracts which is another leap towards the underscoring of efficiency of the real business sector. The abovementioned committee has suggested a very low or zero tax on capital gains. This would definitely put India ahead of its global competitors in terms of competiting for inward investment. The report also suggested that limited liability partnerships be turned into tax-efficient pass throughs. Tax competition and the reduction of sharp tax wedge will probably play the major role in the future of economic reforms which India is ought to undertake to launch the level competitiveness on a higher platform.

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