When then finance minister Pranab Mukherjee imposed a retrospective tax on Vodafone in his 2012 Budget, the BJP sitting in the opposition lampooned Mukherjee. The BJP, during the election campaign, had even described the UPA tax policy as “tax terrorism”. It was not just the BJP which was on the offensive. Other ostensible market-friendly advocates, too, got into the attack. But now the BJP finds itself embarrassingly in the same position as Mukherjee did then. As the tax authorities notified the foreign institutional investors (FIIs) about dues under Minimum Alternative Tax (MAT), which is to a tune of US$6 billion, the amount could scale up to about US$10 billion on computing the latest assessments for the last financial year, ending March 31, 2015. This is part of the capital gains tax. The FIIs need not pay the MAT from 2016 onward because finance minister Arun Jaitley scrapped the provision in his 2015-16 Budget. The FIIs were hoping that the new budget provision would have a retrospective effect. It is not an unfair expectation, given that the new amendments to the tax law extend to the preceding seven years. But the government is unwilling to oblige. Jaitley has defended the tax authorities’ demand as legitimate. He says legitimate tax demands cannot be described as tax terrorism, and he has even gone on to say that India is not a tax haven. An interesting turnaround on the part of the BJP. 

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Many economic experts believe that the only way to attract foreign investors is to offer tax incentives. The implication is that there should be a tax holiday at least for a few years to be followed by minimum taxation. The tacit objective is to push for zero tax. But successful economies do not work on the principle of low or no taxes. They depend on developed markets, where there are enough buyers for the manufactured goods and services. India needs to promote business-friendly conditions. Lower taxes do not help in this regard. However, unable to create conducive conditions for businesses, Indian policymakers opt for the short-sighted policy of tax incentives. And this strategy has not been very helpful.

There is also the other aspect of taxation: rationality. If a manufacturer, businessman or investor is making fair profits from their ventures in India, it is but fair for the local authorities to demand tax. The condition is that the tax should not be punitive or debilitating. If the tax demanded is fair, then there is no reason for foreign or domestic entrepreneurs to grudge its payment. 

It is a fact that compared to the developed economies, the costs of production as well as the wages and salaries in India are low, and it makes business sense to work out of India. If the tax liability is reasonable, it is hardly fair to talk of tax terrorism. Now that the BJP is in power, its leaders are willing to swallow their own words. Jaitley had already done so by arguing most reasonably that a legitimate tax demand is not the same as tax terrorism. He knows that a tax regime is sine qua non of any stable economy. The truth is that even a tax-friendly country cannot write off taxes. It is also salutary that the finance minister has made it clear that India is not a tax haven, which is the refuge of tax-evaders and murky economic players.