India has made it clear that it is opening itself up to foreign investment. In a series of statements, including those from Finance Minister Arun Jaitley, the government has clarified that it wishes to put an end to the kind of unfriendliness towards foreign capital with which the last government appeared to have irked the investing community in general. The problem had begun above all from the treatment of the tax dispute with telecom major Vodafone. Whether or not the government's position in that particular case had some level of justification to it is not the point; the point is that it served to demonstrate that foreign companies had limited options if the Indian government chose to serve a tax notice of some kind on them. The arbitrariness of the Indian taxman is justly feared. Thus, the government's decision to make it clear that such days were over was welcome.
It is unfortunate that even though the highest levels of the government gave the impression that tax collection would be less arbitrary and backward-looking, the tax department does not seem to have got the memo. Indeed two recent actions will have caused foreign investors to sit up and take note. The first is the action taken by the tax administration of the Karnataka government against the e-commerce giant Amazon. The tax authorities have cancelled the licences of several third-party vendors that work with Amazon in the state. They say that Amazon's India business model - in which the company buys a warehouse, and charges third-party retailers rent and delivery charges - is not valid. In other words, Karnataka's tax authorities are trying to force Amazon out of the state. Amazon, remember, has promised to invest $2 billion in India, including in back-end infrastructure of the sort that India desperately needs to reduce transaction costs. But it appears that tax authorities will not be helpful. Neither will the Centre's enforcement directorate, which is reportedly concerned that Amazon India's business model breaches the restrictions on foreign investment in multi-brand retail.
The second action was reported by this newspaper recently. Foreign portfolio investors who are structured as companies have been hit by a demand that they pay minimum alternate tax on their gains in the Indian equity markets. This, again, was a decision taken internally by the tax department. The government had recently attempted to reduce uncertainty by saying that profits for foreign institutional investors, once their operations were shifted within the country, were capital gains, and not business income. But it appears the tax department is not convinced by this logic, even though it would be argued that these cases pertain to a period prior to the changes introduced through the Budget last July.
Whether or not these are both defensible instances of the enforcement of the law is beside the point. Indian tax law is often vague and allows the tax departments' enforcement to become worryingly variable - which is why advance rulings are so much in demand, where available. What is worrying is that the various tax departments, central and state, do not apparently intend to play along with the Centre's decision to be more open and clear with foreign investors. Once again, this is a reminder that a lot more has to be done about tax administration in this country than just reforming the laws. It is about an institutional culture that has been allowed to build up that must change. The taxman must be held accountable.
