Narendra Modi must tame the turbulent tax system in India

Had Benjamin Franklin lived in modern day India he might have used a different word from "certain" to link death and taxes. In a country where the wheels of government turn so rustily, tax demands can still arise with the sudden violence of a mid-afternoon monsoon. In March the oil and gas explorer Cairn India was hit by a bill for Rs205bn ($3.3bn) in tax and interest. This month looks to be the turn of foreign fund managers. Aberdeen Asset Management is the first to admit being stung; the likelihood is that there are plenty more yet to go public.

The net snaring hundreds of fund managers was never meant for foreign firms. The Minimum Alternative Tax (MAT) was put in place in 1997 to stop domestic businesses avoiding their dues. But alongside a retrospective tax law passed in 2012 the MAT has allowed eager tax inspectors to chase after foreign companies for bills they never thought should be paid.

This mess is not the fault of the current government, led by the zealously pro-business Narendra Modi of the Bharatiya Janata party. It was the previous Congress-led administration that passed the 2012 law, as part of a long drawn-out feud with Vodafone. But rather than repeal it, Arun Jaitley, Mr Modi's finance minister, used his first budget merely to assure investors that his government did not plan to use such measures again. Old cases were left to be fought over in the courts. In the words of one tax adviser: "The whole mile has not been walked."

This is regrettable. India under Mr Modi, who is touring Europe, is starting to fulfil its untapped potential. The most recent IMF World Economic Outlook forecasts growth in the Indian economy of 7.5 per cent both this year and next, outperforming China for the first time in decades. But India is a long way from overhauling its Chinese rival, and will only do so with a sustained programme of reform that permanently raises its growth rate.

Mr Modi was elected to national office on a promise to deliver the same stellar economic performance that he achieved when chief minister of Gujarat. He has benefited from the appointment of Raghuram Rajan as governor of the Bank of India who has injected much-needed credibility into macroeconomic management. Falling energy prices have also provided a welcome boost to growth.

But steadying the macroeconomic boat was the easy part. Alongside worn out infrastructure, persistently low private sector investment is evidence of a business environment so dire that it threatens India's future prosperity. Everywhere the state looms large, directly owning many industries and regulating too heavily elsewhere.

After a slow start Mr Modi has picked up the pace of reform. Foreign investment limits have been raised and a plan made for a national sales tax to replace a hotchpotch of state levies. Mr Jaitley promises more funds for infrastructure, and there are moves to make it easier to acquire and build on land. But the unexpected bills shoved through corporate letterboxes signify a large problem still in need of resolution.

The government is surely strong enough to forswear the facile popularity that others seek when hammering a foreign firm. It should now finish the mile it started by fully rescinding the retrospective tax measures still in statute. As with the sales tax, Mr Modi should make corporate tax more of a national affair, and provide the administrative funds needed to stop legal squabbles dragging on for years. India's promising start under Mr Modi will not evolve into Chinese levels of growth while investment is subject to capricious taxation.

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