Pitching for harmonisation of tax laws across national borders, Planning Commission Deputy Chairman Montek Singh Ahluwalia on Friday favoured India taking steps to align its rules in line with best global practices to make the environment more conducive to foreign investment.

Speaking at a global tax conference here organised by the International Fiscal Association (India branch), Mr. Ahluwalia noted that it was cross-border divergences and differences in interpretation of tax laws that gave rise to disputes as in the Vodafone taxation case.

“Every country's tax laws should meet international harmonisation... “We do need a much better understanding, both among professionals and the government, that although a complete harmonisation may be not possible, nevertheless, it is an important thing that we need to do so that foreign investors looking at India find that the tax regime on the whole is conducive to investment,” he said.

Mr. Ahluwalia argued that a harmonised and globally compatible taxation regime would incentivise Indian firms to invest more at home rather than look for economies offering comparatively lower tax rates. In this regard, he pointed out that the government and taxation experts, while framing laws, should ensure that the rules are kept simple and help in achieving economic development. “Besides, the enforcement mechanism should also be transparent and the tax laws should not add to distortions,” he said.

With most of the countries following the ‘free market regime' in a globalised world, different jurisdictions have their own interpretation of whom to tax and whether the levy should be on the basis of source of income or residency. Mr. Ahluwalia pointed out that it was due to this lack of alignment in laws across jurisdictions that issues like the Vodafone affair arise, wherein the telecom major was initially asked by the Indian tax authorities to pay Rs 11,000 crore for acquiring a stake in Hutchison Essar, but the demand was subsequently stuck down by the Supreme Court.

In reply to a query whether the Direct Taxes Code (DTC) Bill should have been looked into by an expert group, Mr. Ahluwalia did not favour referral of such legislative Bills, while terming the process of its finalisation a landmark one. Noting that it was true that the DTC was not referred to an expert group, he said: “The process that the Finance Ministry adopted for the DTC was a landmark one in terms of transparency and inviting comments… Personally I am not in favour of the referral to expert groups because they take only a particular view… The business of appointing groups actually stops the Ministry from considering any other view...”

The DTC Bill, which seeks to modernise the direct tax regime by replacing the Income Tax Act, 1961, is now under scrutiny by the Parliamentary Standing Committee on Finance chaired by the former Finance Minister and BJP leader, Yashwant Sinha. The committee is expected to finalise its report on the DTC Bill at its meeting on February 17.

With the new tax regime unlikely to come into force from the new fiscal beginning April 1 as was planned earlier, some of its provisions are expected to be incorporated in the Budget for 2012-13 to be presented by Finance Minister Pranab Mukherjee on March 16.

Commenting on the process of adopting the new tax regime, Mr. Ahluwalia said the feedback obtained on the original draft has led to substantial changes. “The DTC [draft] was put on the website more than three years ago. Groups and associations were invited to comment. Based on those comments the Ministry has made the DTC... My understanding is that the Standing Committee is taking an open approach to this... The Ministry itself is open and receptive to inputs,” he said.

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