The 2011 International Fiscal Association (IFA) congress opened on 9/11 at the Paris convention center to show solidarity on the 10th anniversary of terror attacks. This year’s Congress was attended by over 2400 participants representing over 50 countries, drawing international tax experts from the profession, academia, tax administrators & tax judges. Set up after the First World War, IFA is the world’s leading non-governmental, body engaged in research in the areas of tax & fiscal matters. The non-partisan nature of IFA prohibits it from lobbying with the Governments. The annual congress affords an opportunity to debate researched topics on financial & economic aspects of taxation .The research papers and congress deliberations serve as useful guidance to countries including bodies such as the OECD, G7, the UN and lately G20 in formulation of fiscal policies. The week is an enriching experience and considered as achieving ‘Tax Nirvana ‘ . The Indian contingent lately has been well represented, though; the most notable feature is that it had presence of all the three arms of the Government machinery – the legislature, judiciary & the executive. Attending the Congress for years when India was a closed economy was nothing more than a ‘paid vacation’ for professionals like me! Lately, I realized that it is not the case any longer. Every session had mention about our tax policy & jurisprudence and/or was represented by an Indian speaker.
The grand opening was expected to be addressed by Christine Lagarde, the IMF President which she had committed to in her capacity as the French Finance Minister. Due to her absence, the task was left to Jeffrey Owens (JO), Director of OECD’s center for tax policy. In a typical Welsh humor, JO remarked that he is a poor substitute to the charming French lady. JO has been committed to OECD’s tax center for over a decade which has overseen its (OECD’s) domination in formulation of tax policies including several projects influencing member & non-member countries alike, including India. It was a befitting manner to recognize and honor his contribution given his impending retirement in 2012.
Excerpts of Jeffrey Owens opening speech:
On need for greater cooperation and role of emerging economies :
“Today, we know that the only way to address economic slowdown is through inclusive multilateral cooperation. The future of the global economy can no longer be decided amongst a few developed countries. Emerging economies must be included in the equation. Their experience, their knowledge and their contribution are essential to finding durable solutions”.
India clearly along with BRICS ( the new definition includes South Africa and Indonesia) will be seen as playing a significant role in such international cooperation as is evident since the formation of G20 and as I see, the debate on India becoming a member of the OECD would gather momentum.
On lessons from America’s & EU :
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“The outcome from yesterday’s G7 meeting confirms that the world economy is emerging from the worst financial and economic crisis in our lifetime. We have been pretty short of good news, with the continuing sovereign debt crisis in Europe; the US is in denial over the need for a credible fiscal consolidation package. Japan has a new government accentuated by the recent natural disasters. The BRICs continue to grow but there are fears about whether they will have a soft landing. Will inflation creep up to unacceptable levels? Will oil prices be maintained at their current levels? And many countries continue to face fragile housing markets”.
Slowdown is evident for India with inflation and impact of oil price .We have an added evil of ‘high interest’ burden threatening businesses profitability, which will haunt the government with low tax collection in the slowdown cycle.
On monetary policy & public finance:
“The economic crisis has been accompanied not only by a crisis of governance but also a crisis in public finances. Debt to GDP ratios in the OECD area is reaching unprecedented levels with the OECD average exceeding 100% in 2011. The markets need to see a credible long-term consolidation package in place since governments need to reduce their debt levels. OECD studies show that there is strong evidence that higher debt levels lead to lower growth and higher unemployment in the long-run”.
India’s Debt to GDP is neither encouraging in the recent years. Though, if it is not controlled, it can balloon closer to the three digit figure and cause deeper crises. Policy makers need to recall the 13th Finance commission recommendations to bring down the ratio as per the set targets. So, India does have a framework and time bound prescription – it however needs political will and rigor in implementation.
On role of Tax in economic crises:
“Tax must be part of any fiscal solution but the question is how do governments go about redesigning their tax systems to achieve a higher revenue yield and at the same time avoid harming long term growth prospects and maintaining taxpayers’ faith in the fairness of the system? OECD suggests that this requires lowering tax rates and broadening the base, shifting the tax structure towards taxing consumption, and recurrent taxes on residential property, and in cracking down on non-compliance. Move towards creating a more competitive tax environment, one that encourages innovation and investment”.
This is suggestive of how desperately India needs to move ahead with tax reforms, particularly in the area of GST, DTC. Delays in implementation of such critical reforms which would enable India to broaden its tax base, improvement of administrative reforms to streamline compliance will cause more harm and further impact the business confidence index which is already subdued.
On Doha round & cross border Tax disputes:
“It is all too easy for politicians to use tax as a mechanism to protect their home market. To avoid that tax acts as a barrier to the growth of world trade, we need to put a new emphasis on having a real international consensus on what are the rules of the game. Put in place mechanisms that help resolve cross border tax issues before they become tax problems. More countries should move forward with arbitration. Minimizing cross border tax disputes and, when they do arise, resolving them quickly, reduces uncertainty and in today’s environment. Governments need to avoid schemes that place an unacceptable compliance burden on business and deviate from international standards”.
India is becoming a haven for cross border tax disputes given our law, its administration & dispute resolution mechanism. We are inflexible to embrace a shift in our tax treaty policy to adopt mandatory arbitration; a consensus driven approach that improves certainty. We have an archaic tax law dealing with the most sophisticated tax dispute arising out of a 21 century business model. Our tax legislation is in need of an overhaul to address complex issues of cross border tax.
On lawmakers embracing the art of listening “Governments do not always agree – even among the 34 OECD members Business also does not always come to a common position as we can see from the debate in the US on worldwide vs. territorial taxation or here in Europe on the common consolidated corporate tax base. But we need the dialogue and in that dialogue, it is not so important to be a good speaker but it is essential to be a good listener. So as we move forward and redesign our tax systems for the 21st century, let’s listen to each other”.
This is an important message for India as skeptics believe that Tax policy evolution in India is a one way traffic – feedback from the businesses don’t reach the law makers and consultation process is either superficial or ineffective. Similarly, business chambers need consistency in communicating their views to the law makers.
In conclusion, I can’t resist mentioning about a power panel debate on recent international developments and the Indian black money came to the notice. A puzzle was to figure out an appropriate term for ‘black money ’; which neither features in English dictionary nor used in continental Europe ! My IFA colleague, Porus Kaka who had to introduce the case, choose to name ‘Jethmalani case’. So, India now has attention on this debate and the global tax fraternity would be closely observing developments.
(The author is Chairman of BMR Advisors & member of IFA’s Permanent Scientific Committee. Views are entirely personal).