'Foreign Investors are attracted by clear tax regimes'

Shankar Narayanan, Managing Director of Carlyle Group, says raising taxes on the rich will increase the tendency for evasion, leading to flight of capital from the country.

Given the current challenges, what, in your opinion, would make a good budget? What measures or proposals would you like to see?
First, build up infrastructure through public and private investments in areas such as roads, power and urban infrastructure to reduce inefficiencies in business operations. Second, reduce wastage and inefficiency in the agriculture supply chain by encouraging investments in storage and cold chains, reducing time-to-market for farmers, and overhauling the working of Food Corporation of India, etc.

The government should also create a national market by introducing GST. It should encourage private sector investments by reducing red-tape and bureaucracy, and simplifying procedures, especially for small enterprises. FDI and FII inflows should be encouraged. There should be a stable policy regime and stable and equitable tax laws.
A joint effort by the government and private sector will result in efficient deployment of capital. The private sector will bring in the expertise of assessing the need for capital in different parts of the economy and deploy it in a profitable manner. Such joint efforts will be more productive and lead to job creation.

Given the constraints the government faces in raising revenue, do you see a case to increase income tax rates on the rich?
Raising taxes will be a counter-productive measure. It will increase the tendency to evade/avoid taxes and lead to flight of capital from the country. It will discourage capital formation - every rupee of capital invested has a multiplicative effect in terms of jobs created and taxes generated. Broad-based taxation at lower rates always result in the country as a whole becoming more prosperous.

Historically, high marginal tax rates (98.75% in the 1970s) in India were one of the key drivers behind the creation of a large black economy. Economies such as Hong Kong and Singapore have successfully encouraged compliance by keeping tax rates low and having simple tax regimes, resulting in higher tax collections and reducing the growth of the black economy. A smaller black economy means capital remains within the banking system, which can be used to provide a multiple effect through savings and investments.

Raising tax rates in the current environment would result in the salaried class (which bears the brunt of taxes) getting even more burdened whereas the business class and self-employed would indulge in higher levels of tax evasion. This will reduce India's attractiveness to human talent at a time when it is attracting significant talent from all over the world. People of Indian origin are looking to come back to the country. Raising tax rates will also result in a flight of talent and capital overseas.

India should focus on improving compliance and widening the income tax base. Some of the key initiatives that can help in this regard are: a simplified tax regime, lower cost of compliance, less risk of harassment of honest tax payers and improving information systems in the economy.

If the budget does not meet expectations, do you fear that business sentiment would once again dip?
There is a concern that this could be a very populist budget considering the major state elections in 2013, and the last full budget before the next general elections (in 2014). Such a move (a populist budget) could only damage India's financial position further by increasing the current account deficit. That would result in crowding out lending to the private sector through increased government borrowings and an increase in inflationary trends, leading to a higher interest-rate regime and reduction in capital inflows. This will not only reduce the growth capital needed by the country, it will also result in greater depreciation of the rupee, making it more difficult for import-based industries to survive.