New York: Reserve Bank India Governor D Subbarao has appeared to have joined the debate on the recent controversial retrospective taxation provisions saying there is need to have a stable policy, taxation and investment regime to attract foreign capital.
"India has to run a stable policy regime and have a stable taxation and investment regime," he said during his lecture at the Asia Society here.
He was responding to a question on what India should be doing to inspire trust and confidence of investors.
"We need to streamline our foreign investment policy and procedures, improve infrastructure, improve our governance," to make the system more friendly for investors, the RBI Governor said.
"Potential foreign investors have to have confidence that India has a stable, predictable, transparent capital sector regime," he said.
The 2012-13 Budget introduced a controversial retrospective tax provision in the wake of Supreme Court judgement quashing the tax demand on Essar-Vodafone deal.
The Finance Bill also had provisions for introduction of General Anti-Avoidance Rules (GAAR) under which investors rather than tax department have to prove that they do not attract tax provisions.
Subbarao sought to allay concerns that the investment climate in India is losing its attractiveness among foreign investors, saying the country still has an investor friendly environment with the central and state governments anxious to attract investments.
Amid uncertainty over global economy, Foreign Direct Investment (FDI) in India registered a growth of 34 percent to USD 46.8 billion in 2011-12 against USD 34.8 billion in the previous fiscal.
However, portfolio investment or foreign institutional investment (FII) in the country witnessed a decline. During 2011-12, the investment by FII slipped to USD 16.8 billion in 2011-12, down by 42 percent over the previous fiscal.
The Current Account Deficit was 4.2 percent of GDP last year, which was a quite high.
"One of the dilemmas in managing capital account is that we have to run a fairly stable regime. We cannot be fickle- minded in terms of policy. It cannot be that we allow capital today and disallow it tomorrow," Subbarao said.
While Parliament approved the provision, Prime Minister Manmohan Singh had ordered its review after he took charge of the Finance Ministry following the elevation of the incumbent Pranab Mukherjee as President. Mukherjee himself had deferred GAAR's implementation.
New Finance Minister P Chidambaram had given an assurance shortly after taking over that corrective measures will be taken to put in place a stable and non-adversarial tax regime.
He has also directed a review of tax provisions that have a retrospective effect in order to find a fair and reasonable solutions to pending as well as likely disputes between the tax department and assessees concerned.