People following traffic rules overseas start ignoring traffic rules when driving in India. After my recent overseas visit, I came to know how much beating, the image of India has taken lately. This deterioration began two years ago. Many believe that negative perception during Common Wealth games and occurrence of 2G scam around same time played a very big role in India's image taking a serious hit. Before that India was seen as a shining star in the world stage, more so since her growth story was built on the foundation of a vibrant democracy. Many foreign investors felt good about the growth of India as reconfirmation of the power of democracy.

Irony

The Government's job is to establish the law of the land, where the players can play by the rules for the benefit of all. The current political leadership should have been celebrating the completion of two decades of liberalisation and associated Indian growth story.

At that time, a number of over arching laws were simplified. With that experience, the current political leaders are looked upon to provide thought leadership in these times. This, precisely, is the irony.

It is hard to understand why the leadership is not coming out quickly from the current quagmire on GAAR (General Anti-Avoidance Rules). Every change in the law must happen with the objective of simplifying and clarifying the law. It should aim to obviate the need of lawyers and reduce stress on the over burdened judicial system.

The proposed GAAR has created exactly the opposite impact. It has unnerved the foreign community. There is stark reversal of the FII flows in the month of April.

It is legitimate to ask the enterprise which derives value out of India, to pay its share of taxes in India. Therefore, transactions done purely on the principle of tax arbitrage or to bypass tax laws with creative structuring, raise suspicion. It is similar to people following traffic rules overseas, start ignoring traffic rules when driving in India.

It is a question of a perception rather than the principle. It reflects the essential character of the market. If the general consensus is that tax avoidance is accepted then, any attempt by Government to fix the same, would face stiff opposition.

However, in such times, it becomes extremely critical for the Government to act fast and be seen as fair and unprejudiced.

Private players play a critical role in the development of the nation. Most of the players want to play by the rules in the market. However, they want the rules to be disclosed upfront. Investors are willing to stay put in bad markets, but abhor the uncertainty of the law.

There are compelling reasons to believe that many investors want to participate in the growth of India. Paying tax for such gains is acceptable and dutiful.

Time to prove

We, as country, also need to be cognizant that while China and the UK have got away with retroactive tax, India has yet to reach such a stature. That is where we have erred on judgment. India is new entrant in this game and has to prove its mettle in order to be accepted in this club.

It has to work extremely hard as country to make the environment credible, and most of all, deal with corruption. Fortunately for India, its nascent markets do not have structural problems which are a menace in most of the developed world. If we put our act together, we have strong case for climbing the ranking in the G20 ladder. It is a life time opportunity which is getting wasted.

Government, FIIs and domestic players all want to get most out of the Indian growth story. The opportunity is real and present and if acted right will result in win-win situation. We expect a quick action on this urgent matter by the Government so that the country regains its legitimate credibility.

Similarly, FIIs which have invested in long-term story of India also must play active role in engaging with Government and help in the formation of right regulatory environment. After all, these uncertainties are priced in the higher returns of the developing market.

(The author is Chief Operating Officer, Daiwa Capital Markets India Pvt Ltd. The views are personal.)

comment COMMENT NOW