Tax policy should be shorn of extraneous objectives: expert

Loading the tax policy with objectives will not help the economy, according to an economist.

Delivering the keynote address on the topic ‘Role of chartered accountants in tax policy in the emerging environment’ at the national conference of Institute of Chartered Accountants of India (ICAI) in Mangaluru on Friday, M Govinda Rao, Emeritus Professor at the National Institute of Public Finance and Policy, said governments pursue several objectives through tax policy and this creates a breeding ground for special interest group politics.

‘Doubtful results’ Loading the tax policy with objectives such as encouraging savings in investment, promotion of exports, investment in particular industry, regional development, small scale industries development, promotion of particular type of technology and development of enclaves such as special economic zones have led to the government providing a plethora of exemptions and concessions.

This not only complicates the tax system, which increases administrative and compliance costs, but also results in large revenue losses. Their impact on achieving the intended results is at best doubtful, he said.

“Yet, every government gives incentives, narrows tax base and creates distortions. Indeed, that increases the business for both economists and chartered accountants, but will not help the economy,” he said.

Grey area Highlighting the grey area in moral and legal obligations, Rao said some multinational companies avoid and evade taxes, often aided and abetted by accounting firms.

Many of the developing countries have not been able to effectively legislate and implement the general anti-avoidance rules due to the lack of capacity or merely due to arm-twisting tactics of multinational corporations.

In the race between tax administrations and multinationals, it is the latter that always win because multinationals have the capacity to engage the best chartered accountant and legal firms. This denies the developing countries much needed resources for investment in physical infrastructure and human development.

“Here is a clear dilemma that the profession is faced with and the solutions are not easy or clear. It is here one is faced with the challenge of bringing in correct legislations and their proper interpretations,” he said.

Stating that there is no case for retrospective amendments or retrospective actions by the tax administrations, Rao said appropriate and clear advice on the matter can help prevent unavoidable litigations and ensure legitimate tax payments to the governments.

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