Tax bullying never works.

Foreign Direct Investment in India fell by 39% to a paltry $19.1 billion between April and December 2012 compared to the previous year while the Current Account Deficit has grown to 6.7% of GDP in the third quarter. The desperate government is trying finance the deficit by increasing the limits on foreign investment in bonds and by increasing interest paid on bank deposits by Non Resident Indians. This is hot money and could flee any time but FDI is stable and long term and so much more beneficial. With labor costs jumping in China, increasing bullying by the Chinese government and the tension on the Korean peninsula we should have seen an increase but it has fallen precipitously. The reason is that our tax laws are hazy and confusing and that gives the country a bad reputation. On 30 March Shell India was asked to pay Rs 50 billion in taxes by our tax officers. Shell had sold its shares to its parent company for Rs 10 a share, which would be its face value, but the tax fellows say that the shares should have been sold at its market price of Rs 187 a share. Thus this was seen as " hidden income " and a tax demand followed. This is known as transfer pricing and at least 20 multinationals are facing tax demands for this alleged offence. ET, 11 April. Vodafone is facing at least 3 tax demands for transfer pricing in addition to the original demand of $2 billion which accrued when it did not deduct tax from the $11 billion it paid for the purchase of Hutch Essar from Hutchison Whampoa through a Cayman Islands branch. Vodafone won in the Supreme Court but the demand persists. Total demand on Vodafone could be as much as Rs 150 billion which is almost half of its turnover of Rs 320 billion in 2011-12. How is it that companies pay up quietly when demands are made in the US or Europe but cry foul whenever any demand is made in India? It could be because our taxes are too high or there are too many taxes with the center, states and municipalities all with begging bowls or they are too confusing with loopholes deliberately left in to help politicians and their friends avoid paying any tax while ordinary citizens are being squeezed dry. Yesterday the French President Francois Hollande said that he is going to " eradicate tax havens in Europe and the world " because he desperately needs money for his socialist agenda, just like the Congress does in India. However, it is unlikely that he will succeed. Even if all tax havens were to close what will he do about countries that openly charge low rates of corporate and individual taxes like Ireland and Singapore? Rich people and MNCs will just move to these countries to take advantage of much lower rates while France and India will still lose out. When countries compete for foreign investment the only way is to have low and simple tax rates. But then where will they get the money to bribe the electorate?