Don’t Just Postpone GAAR; Flush It Down The Toilet: Chetan Bhagat
Noted novelist Chetan Bhagat has launched a scathing and no-holds barred attack on the Government’s policies which he claims have driven away foreign investors and ruined the economy. GAAR is the root cause of all evil, he says, and implores the Prime Minister to “flush it down the toilet” so as to create a business friendly tax regime and restore investor confidence
Chetan Bhagat, in his article in the Times of India, draws on his rich experience as a merchant banker to explain that foreign investors are drawn to invest in a country for two reasons: first, its growth prospects and second, the stability of its economic and fiscal policy. The problem with India, he says, is that its fiscal policies are highly unstable. No one can say with any certainty whether a certain fiscal policy introduced today will be continued tomorrow or not. In this, Bhagat is echoing the timeless wisdom of Nani Palkhiwala who, as early as in 1993, sounded the warning that the Mandarins of North Block were making a big blunder by mistaking change for progress and mindlessly churning out ill-thought out amendments to the Income-tax Act year after year. Even in contemporary times, eminent senior advocate Harish Salve explained that the reason why China was miles ahead of India in terms of foreign investment and progress was because, though it was a totalitarian regime, it was a model for stability in its fiscal policies. The law was not amended frequently to suit the whims and fancies of the people who are in power.
In contrast, the “arrogant government policies such as GAAR” have created an “uncertain and arbitrary environment” in India says Bhagat. This has resulted in three international rating agencies downgrading India’s status as an investment destination, he adds.
Bhagat calls GAAR a “disaster” and makes it plain that he has absolutely no confidence in the income-tax department being able to administer GAAR in a rational manner. Given the sweeping powers that have been given to the Assessing Officers to question any transaction ever done by a company and label it as tax avoidance, there is enormous scope for abuse of power, he says.
Bhagat does not mince words. He says that the perception of GAAR as being a “draconian rule” is so bad, that it cannot be sugar-coated or postponed, but has to be “thrown out”. “Nothing short of flushing GAAR down the toilet will work” he adds with emphasis.
Bhagat also faults the Government’s action in retrospectively amending the law to supercede the Supreme Court’s verdict in Vodafone vs. UOI. Bhagat explains that the cumulative effect of GAAR and the Vodafone law is that investors, both in India and abroad, “have a sneaky suspicion that the Indian government is out to get us”. He points that the sentiment is that “if a hapless investor puts the money in our country, works hard and waits patiently for years, the government will come running to pluck the fruit right when it ripens”. Such “Government tyranny” and “greed to collect some extra taxes” destroys investors’ confidence, he says, and makes them run away from India.
Draconian measures like GAAR and the Vodafone law which have spooked even the most-ardent India believers are short-sighted and akin to “killing the golden goose for dinner”, he adds with a flourish.
He also points that the Government “thrives on hubris” (extreme pride or arrogance, a loss of contact with reality and an overestimation of one’s own competence). It is used to passing unjust orders that common people in India are only too happy to accept. He subtly reminds the Government that while Indian investors have no choice but to live with the arbitrary policies of the Government, the foreign investors are not subject to any such limitation. They don’t want to take any chances. There are a number of countries wooing the foreign investors and they will be forced to abandon India en masse and migrate to foreign countries if they get disillusioned with India, he warns.
Bhagat, however, sees a ray of hope in the mildly proactive stand being adopted by the Prime Minister who also took over as Finance Minister. The Prime Minister, being an eminent economist himself, has seen the severe damage that short-sighted policies like GAAR and Vodafone can create. On Vodafone, the Prime Minister has directed the Income-tax department to “go slow” till he mulls over all its implications. On GAAR, the Prime Minister has sent a clear message that he is not happy with the present state of affairs by appointing a high-level committee to undertake stakeholder consultations (see also Dear Prime Minister, Scrap GAAR & Vodafone Law & Redeem Yourself)
Implied in Bhagat’s criticism are two suggestions for the Prime Minister to consider. First, set up a high-powered committee of economists, industrialists and bureaucrats (but not form the income-tax department) to objectively consider whether GAAR is at all appropriate and suitable for India at the present moment given (a) the level of immaturity of the income-tax department, (b) the dismal state of our dispute resolution system and (c) the adverse impact that GAAR will have on Indian and foreign investment. In fact, in the United Kingdom, an impartial panel was first set up to consider whether GAAR was at all suitable for that Country. Then, GAAR was enacted with a number of safeguards to ensure that there is no arbitrary application of the law by the income-tax department. We should adopt that model and tread carefully instead of rushing in blindfloded. Bhagat’s second suggestion is that a law should be enacted that will protect the sanctity of markets and interests of participants. He assures that both these measures will, if implemented, reassure investors that India has not only an open mind, but is also open for business and the billions of dollars in investment will again start to flow back into the Indian economy.