Retrospective taxation a “significant disincentive” for new businesses: Panel

Terming retrospective taxation a “significant disincentive” for entities wishing to do business in India, a government-appointed panel has suggested a string of legal, administrative and regulatory reforms to make the country a better and easier place for doing business.

The panel has also suggested simpler drafting of rules to avoid leaving room for interpretations, while recommending greater autonomy to regulators, transparency in selection of heads for regulatory bodies, incentives for states undertaking key reforms and faster resolution of disputes through arbitration mechanism and consent settlements.

In its 77-page report for reforming the regulatory environment for doing business in India, former SEBI Chairman M. Damodaran-headed expert panel said that “death and taxes are equally undesirable aspects of human life”, but even death is “never retrospective”.

“Retrospective taxation has the undesirable effect of creating major uncertainties in the business environment and constituting a significant disincentive for persons wishing to do business in India.

The Damodaran panel, which was set up in August last year after India was ranked very low at 132nd position in World Bank’s ease of doing business list among total 183 countries, has made as many as 20 recommendations. These are classified in five broad categories -- legal reforms, regulatory architecture, boosting efficacy of regulatory process, enabling MSMEs, and addressing state level issues.

Stressing the need for an easier set of regulations for MSMEs, the panel said the large enterprises may have the wherewithal to deal with the complex business environment, but a greater coordination amongst ministries and policymakers is required for MSMEs.

It has also asked the central and state governments to review all the regulations affecting ease of doing business to reflect the modern day trade and commerce.

The panel said it is necessary to have single window channels of compliance to help small business entities and also a hassle free tax payment regime.

“As regards the new entrants to the business environment, there should be facilitation centres to help deal with the complexities of filling cumbersome forms and dealing with other procedural issues,” it said.

To address state-level issues, the panel said that each state government can appoint a nodal person and a nodal office, which can be the single point contact for persons intending to obtain information on procedures and conditions for setting up a business.

“With an urgent need being felt to accelerate the process of simplification of regulations and consequently expediting the necessary approvals, the Committee recommends that State Governments that make significant progress in this matter should be appropriately incentivised,” it said.

“There should be built into the system an appellate process where a person aggrieved by an order of rejection may, as a matter of right, approach a superior authority for reconsideration of the matter on merits,” the panel added.

The issue of retrospective taxation created a major controversy after UK-based global telecom giant Vodafone was asked to pay out a significant amount as taxes through a retrospective amendment to taxation laws pursuant to a Supreme Court order rejecting the government’s tax demand from the company.

The government later offered conciliation with Vodafone on the matter.