Editorial: Better tax compliance

Feb 25 2014, 02:52 IST
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SummaryG20 reaffirms commitment to tax reforms

Though the G20 communiqué talks of raising global GDP by more than 2% above the business-as-usual scenario—this will add $2 trillion in real terms in 5 years—by synchronising policy, it is not quite clear as to how this is to be achieved. Much less, the oft-stated Indian position that while unwinding its unconventional monetary policies, the US should keep in mind the problems this will create for countries like India—indeed, the unconventional monetary policies gave India a free ride when they were being rolled out, and the longer you keep them in place, the more problems the inevitable unwinding will create. Nor is it quite clear, desirable though the goals may be, how the risks to the global financial system are to be addressed. Ending too-big-to-fail financial institutions is an admirable task, but it is more local than global and there is little that can be done to address the shadow banking risks till the Chinese decide to cooperate—and even if they do, as the Lehman crisis showed, any precipitate action in allowing one or two shadow banking companies to fail can trigger off a much larger crisis. Greater swap lines and emergency capital support from the IMF, though, would be welcome.

What is more substantial, and should make Indian tax authorities happy, is what the communiqué says about ‘base erosion and profit sharing’ (BEPS). In a nutshell, that says profits should be taxed where economic activities are performed and where economic value is created. Though the Vodafone case where India brought in a retrospective amendment was different in the sense the Supreme Court had ruled in Vodafone’s favour as the Indian law at that point did not provide for this, BEPS works in India’s favour. So, as and when the G20 is able to convince all tax havens to comply with BEPS rules, countries like India will be able to tax transactions such as Vodafone’s where, though the company sold was based out of a tax haven, the economic value was being created in India. The commitment to greater sharing of information by the taxmen of various member countries has also been reaffirmed, and once again that will help the Indian taxman.

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