Government should consider simplifying, rationalising tax laws in Budget to boost FDI: Experts

India, a rapidly growing economy with vast potential, constantly seeks avenues to accelerate its development journey. Foreign Direct Investment (FDI) is a crucial catalyst in this process, bringing capital, technology, managerial expertise, and fostering job creation. The background to these expert suggestions lies in India's continuous efforts to enhance its attractiveness as a global investment destination amidst intense international competition. Despite significant reforms, India's tax regime, at times, has been perceived as complex, leading to uncertainty for foreign investors. This perception, coupled with the global economic slowdowns and geopolitical shifts, necessitates a renewed focus on making India's economic environment more predictable and investor-friendly. The government's 'Make in India' initiative, launched in 2014, and various 'Ease of Doing Business' reforms have already laid a foundation, but experts believe more targeted measures are needed, especially concerning fiscal policy and taxation.

The core of the expert recommendations revolves around three interconnected pillars: simplifying and rationalizing tax laws, reducing the cost of capital, and demonstrating a credible path towards fiscal consolidation and debt reduction. Simplifying tax laws entails reducing the number of exemptions, streamlining compliance procedures, and ensuring greater clarity in interpretation. This is paramount because a complex tax system increases compliance costs for businesses, creates ambiguity, and can lead to prolonged litigation, all of which deter foreign investors. For instance, frequent retrospective tax amendments in the past have significantly impacted investor confidence, highlighting the need for stability. The objective is to create a predictable and transparent tax environment that assures investors of long-term policy consistency.

Reducing the cost of capital is another critical suggestion. Capital, whether debt or equity, comes at a cost, and for businesses to invest and expand, this cost needs to be competitive. High interest rates, inflation, and perceived economic risks can drive up the cost of capital in India. Efforts to reduce it could involve a mix of monetary policy adjustments by the Reserve Bank of India (RBI), government-backed credit enhancement schemes, and measures to improve the overall financial market efficiency. A lower cost of capital directly translates to higher profitability for businesses and makes new projects more viable, thereby encouraging both domestic and foreign investment.

Finally, signaling a credible medium-term path of fiscal consolidation and debt reduction is vital for macroeconomic stability. Fiscal consolidation refers to reducing the government's budget deficit, while debt reduction aims to lower the national debt. A high fiscal deficit can lead to inflation, higher interest rates, and crowd out private investment. Excessive government debt can raise concerns about the country's creditworthiness, making it more expensive for the government and private entities to borrow. The Fiscal Responsibility and Budget Management (FRBM) Act, enacted in 2003, was a significant step in this direction, aiming to instill fiscal discipline by setting targets for deficit and debt. Adhering to such frameworks and outlining a clear strategy in the Budget reassures investors about the government's commitment to sound economic management.

Key stakeholders in this discourse include the Union Government (specifically the Ministry of Finance, which frames the Union Budget, and departments like the Central Board of Direct Taxes (CBDT) and Central Board of Indirect Taxes and Customs (CBIC) responsible for tax administration), foreign investors (multinational corporations, private equity firms, venture capitalists), domestic industry associations (CII, FICCI, ASSOCHAM), economic experts and think tanks (who offer these recommendations), and the Reserve Bank of India (RBI), which manages monetary policy and influences the cost of capital. Foreign investors are directly impacted by tax policies and the overall investment climate. Domestic industry benefits from reduced capital costs and a stable economy. The government aims to balance revenue needs with growth imperatives, while the RBI strives for price stability and financial system health.

This matters immensely for India. Increased FDI leads to capital formation, job creation across various sectors (manufacturing, services), technology transfer, and improved productivity. It helps bridge the infrastructure gap and enhances India's integration into global supply chains. A stable fiscal environment improves India's sovereign credit rating, attracting more portfolio investment and reducing the cost of external borrowings. It also frees up government resources for critical social sector spending (education, health) and public infrastructure. Historically, India's economic reforms since 1991 have progressively opened up the economy to FDI, demonstrating the long-term commitment to such policies. The introduction of the Goods and Services Tax (GST) in 2017 (under Article 279A of the Constitution) was a landmark tax reform aimed at simplifying indirect taxation, though direct tax simplification remains a continuous process.

Future implications suggest that if the government successfully implements these recommendations, India could witness a significant surge in investment, leading to higher GDP growth and improved living standards. A simpler tax regime fosters a more predictable business environment, crucial for long-term investment decisions. Reduced cost of capital makes India a more competitive destination compared to other emerging markets. Fiscal prudence ensures macroeconomic stability, which is a prerequisite for sustained growth. However, challenges remain, including balancing the need for revenue generation with tax simplification, navigating global economic uncertainties, and ensuring effective policy implementation. The Union Budget, presented annually (as per Article 112 of the Constitution), serves as the primary instrument for signaling these policy directions. The government's actions in the upcoming budget will be closely watched by investors and analysts, determining India's trajectory in attracting global capital and sustaining its economic growth momentum.