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Tax reforms may ease FDI inflow

Subhomoy Bhattacharjee in New Delhi

The big push for tax reforms in the forthcoming Budget is likely to be on creating a suitable environment for easier flow of foreign direct investment.

While there are few specific tax provisions in the statutes that differentiate between foreign and domestic investments, government sources said the thrust of the two committees working on reforms in direct and indirect taxes would focus on removing hindrances in tax procedures that foreign investment baulks at, instead of creating a fresh set of incentives for them.

Accordingly, the committees on direct and indirect tax reforms set up by Finance Minister Jaswant Singh are examining the issues involved in phasing out exemptions and subsidies, tax administration reforms, setting up mail boxes for receipt of documents and a review of powers to summon and prosecute companies.

The committees chaired by Vijay Kelkar, adviser to finance minister have representatives from different sections of the industry and the revenue department of the finance ministry.

According to sources associated with the committee, while FDI does not flow in on the basis of tax environment, it is necessary to create "an enabling tax regime for it".

They also said among the tax rate changes that the committee on direct tax might look at, would be to reduce corporate tax rates for branches of foreign companies, which are currently at 42 per cent.

The rate for domestic companies and subsidiaries of foreign companies are 36.5 per cent, even though the effective difference between the two is lower since the branches of foreign companies do not pay dividends.

The NK Singh Committee on FDI has also made a similar recommendation. Government sources said to facilitate FDI, it was also necessary to focus on phasing out distortions in indirect taxes, including Customs duty rates, by ensuring there were not more than two or three internationally competitive rates.

They said the committee had recognised the need to adopt best international practices, including timeframes in work procedures in Customs clearance.

To speed up payment procedures relating to competitiveness, the committee has also decided to have consultations with the banking sector.

The issue has also figured indirectly in the meetings of the Indian delegation with Bush administration officials on Monday.

Talking to reporters later, an Indian spokesperson said the government was trying to attract more foreign direct investment by establishing special economic zones.

He added that the government wanted to cut barriers to business by delegating much of the regulation, including foreign exchange rules, to the local governments.

The tax committees will prepare a consultation paper by October 23 for indirect taxes and by the end of this month for direct taxes, which will be put on the Internet for feedback.

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