Government’s tax hunt produces negative image and not revenue.

Vodafone, Nokia, Shell… are some of the MNCs preparing to proceed with legal complaints against India’s revenue department on taxation matters. Already, the Vodafone tax issue has been decisively settled in favor of the telecom giant. Nokia is complaining about the continuous harassment from the officials.

Interestingly, large number of cases about clashes between the revenue department and corporate are reported during the last one year. The Government is on an aggressive tax collection path in the closing periods of the financial year. It is feared that tax collection may report a record short fall this year. So far notices are issued to service taxpaying companies, individual income tax payers as well as to corporate to extract maximum revenue.

When the revenue department is on a mission tax hunt, many tax disputes involving foreign companies are getting wide attention especially in the context of the revenue’s failure in the Vodafone case. The main outcome of the Vodafone issue was not that the Government has lost Rs 12000 revenue.  But rather, in the end, the country’s tax system earned the reputation of one of the most unstable tax jurisdiction in the world. The attempt to amend section 9(1) of the income tax Act in a reciprocal manner has destroyed the image of India as an investment destination with stable and certain tax laws.

No foreign investor will be ready to invest today if there is a chance that some law to be passed in some thirty or fifty years in future takes away the income in the form of taxes.   Hence, the effort to give reciprocity and thus for selective targeting were not good for an ideal tax system.  Certain and fault free legislative framework will encourage foreign investment. The increasing confrontation with foreign investors on taxation matter is not a good sign for a country which badly need foreign investment.  It is better for revenue department to target cases where tax evasion is certain and action should be supported by strong statues. This will avoid negative publicity related with taxation of foreign investor’s activities.

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