 "MNCs equally to be blamed for tax controversies: Raghuram Rajan")
Reserve Bank of India (RBI) Governor Raghuram Rajan has hit out against multinational corporations stuck in various tax controversies, saying they also need to share blame on the same.
"Occasionally, there is government excess but they are not the only ones who commit excesses," he said. "Multinational corporations complain all the time of excessive demand about excessive taxation, but it is also true that MNCs across the world tend to find tax avoidance and sometimes tax evasion an appropriate technique,” he said.
“Therefore, there is a constant fight between governments and MNCs," he said.
In remarks that come within a week of Prime Minister Narendra Modi assuring all retrospective taxation such as the Vodafone case being an issue of the past, Rajan said the movement on taxation within the country had been “positive and in the right direction, including the great debate on retrospective taxation, which has allowed us to clarify our thinking on this issue and the government has stated its position very clearly on the way forward".
Rajan also repeated the need for less regulation to allow more companies to come up and be successful in the system.
“There is a myth that small firms create the most jobs in an economy. The fact is that small firms that grow big create the jobs,” Rajan said while delivering the Nani A Palkhivala Memorial Lecture here on Thursday. The topic was ‘Strengthening of free enterprise in India’.
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For this, regulations should be simplified so that firms that start small can have the scope to grow bigger, he said, adding the country had progressed a lot in this respect. India had abolished the licence raj and now the resources raj is ending, he said these couldn’t be allocated anymore in a non-transparent manner.
Also, with the new Startup India initiative, inspector raj would also end, as inspectors wouldn’t disturb a start-up for the first few years. “That does not mean there will be no regulation but they will be there in an easy to understand but well enforceable manner,” he said.
The role of the government and the regulator is to create a level playing field and provide the rules of the game. That will continue even when unnecessary and excessive regulation are got rid, he said.
RBI itself is trying to simplify its regulations and so is the government. “We are not perfect and we have a long way to go but we have come up a long way,” Rajan said.
To make it easier for smaller firms to do business, a tremendous amount of investment should be made in the infrastructure space and there should be easy access to finance. The new set of small banks would ensure easy access to finance in a way existing banks were not able to provide so far, Rajan said.
Also, the government is “in the process of creating a unique firm ID, the same way as Aadhaar, which will help us identify firms and who is the promoter, and thereby get a sense of the antecedents of firms that will give credit histories, which will allow banks to lend to them,” Rajan said.
He said the notion of giving credit to smaller businesses for job creation in the economy was a "myth", saying it is the large-scale firms alone which do the task effectively.
Rajan hoped the new bankruptcy code would be passed in the next Parliament session — it would be a game changer. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act was good for small entities but not effective for large ones, he said.
“There is a very uneven playing field between creditors and large borrowers,” Rajan said, adding large borrowers could control the system on their own for many years and banks couldn’t do much. However, with small companies, banks are very effective. “Paradoxically, it eventually hurts the large borrowers through increased credit cost by banks, by adding a huge risk premium for the borrower,” Rajan said.
If draconian laws are replaced with new laws like the Bankruptcy Code, it would help everyone in the system, including large companies, he said.
The political environment is also tilting towards introducing new competition and a fair market as millions of jobs need to be created every year for youngsters. “There's a tremendous pressure on the government and the regulator,” Rajan said, adding India itself was tilting more towards entrepreneurship and new businesses.
“For many youngsters now, the many Bansals are the new-age hero and that is a welcome development. We should thank the Narayana Murthys, Nilekanis and Bansals for showing the way,” he said. RBI, he added, was following this new business environment closely. “There is a need to have a large number of smaller firms which are growing to become big businesses, and one should avoid creating a tendency where the entrepreneur prefers to remain small,” he said.
Now and ahead
The governor said it was essential to evolve into a place where money does the talking rather than other elements like one's caste or religion, and added businesses should also stop looking for special dispensations.
Stressing the need for skilling of people, he said "capitalism starts at the age 21" and one should not force children to undergo excessive competition before that.
Rajan said he is very optimistic about India of the present, despite the many problems it faces. ‘We have always found our way to fight the ills and emerge stronger…we have our weaknesses and our excesses but our democracy is self-correcting, and even while some institutions weaken, others come to the fore. India's is a dynamic society, ever changing, ever rejuvenating."
Speaking before Rajan, former RBI board member Y H Malegam flagged the growing instances of trouble caused by fringe elements which threaten the very idea of India, comparing it with the situation where a little man is causing a long shadow during what looks like a sunset.
Rajan quipped, "Though little men cast long shadows at sunset, the sun does rise in our country." "In the spirit of what Palkhivala said, India always seems to find a way, perhaps not quickly, perhaps not linearly, but eventually in due course."