The Finance Ministry appears to be on the wrong tack regarding its taxation policy. Heavy tax demands have recently been made on multinational companies like Vodafone, Shell and Nokia. It has a depressing effect on the investment climate. The demands have come at the wrong moment. The Finance Minister is trying to invite foreign capital to India and at the same time there is tax uncertainty. P. Chidambaram has to wipe out the legacy of his predecessor, Pranab Mukherjee. The present FM should offer certainty about taxes. He has to give the assurance that there will be no retrospective taxes, especially on foreign investors. The tax department will do well to collect taxes and arrears from tax evaders. On the contrary, it seems to harass those who make proper tax returns and somehow twist the law to tighten the screws on them. Foreign investors are easy prey. Indian companies who have not paid taxes are not subjected to hefty demands. The tax administration is far from efficient and is not being cleaned up. As a result, capital inflows are now being unfortunately squeezed.
The current account deficit of India is extremely high. Foreign capital inflow can be a major corrective for that. If that dwindles, the value of the rupee will depreciate and the rate of inflation will go up. The Finance Ministry should not wield the axe unless it is certain that tax laws have been violated particularly in the case of MNCs. It seems that the tax department in India does not realize the gravity of the problems arising from a balance of payments crisis. The Ministry should have its eyes on the macroeconomic scenario. The Finance Minister should not only ensure tax certainty but also offer a better tax policy and tax administration. The emphasis should be on residence-based taxation so that foreign investment does not dry up.