Retrospective Taxation: Issue will nøt end
STORIES, ANALYSES, EXPERT VIEWS
Prime Minister Narendra Modi Wednesday said the decision to end retrospective taxation would strengthen trust between the Government and industry. “Recently, fixing mistakes of the past, we have decided to end retrospective taxation. The way in which this is being appreciated by the industry makes me believe that this will lead to the trust between industry and Government being strengthened,” Modi said at the annual session of the Confederation of Indian Industry (CII).
The Prime Minister’s remarks came after both Houses of Parliament cleared amendments to the Income-Tax Act and Finance Act, 2012 to ensure that no demand shall be raised in connection with retrospective tax for any indirect transfer of Indian assets if the transaction had been undertaken before May 28, 2012.
Following the retrospective amendment moved by the UPA government in 2012, tax demands have been raised in 17 cases, including against British telecom company Vodafone and gas major Cairn Energy. The Government will have to refund an estimated Rs 8,100 crore to such companies in lieu of taxes collected earlier.
The Vodafone case
There has been a sigh of relief at the proposed amendments. Everyone felt that it was the end of what is considered late Finance Minister Pranab Mukherjee’s policy folly as finance minister in 2012, before he became President in July of that year.
Mukherjee’s amendment was specifically used against Vodafone which purchased 67 per cent of the shares in the mobile services firm Hutch-Essar from Hong Kong’s Hutchison Whampoa in the Cayman Islands, a tax haven, through an intermediate company. The tax department issued a showcause notice to Vodafone. Vodafone appealed but the Mumbai high court rejected it in September 2010. Voda-fone appealed to the Supreme Court which on January 20, 2012 ruled that Vodafone was not liable to pay the capital gains tax as the transaction took place in foreign territory involving foreign companies.
The Mukherjee amendment came on February 1, 2012. Mukherjee explained that India was not a tax haven nor was it a tax-free country.
The Narendra Modi government took seven years to move the amendment to annul the retrospective tax amendment. Finance minister Nirmala Sitharaman said that by removing the retrospective tax provision, the BJP was fulfilling its promise of not making unfair and arbitrary tax demands.
But the Modi government, writes Parsa Venkateshwar Rao Jr (senior journalist and political commentator) “seems to have spent large amounts of money just to score a brownie point against the Congress government as the international arbitrator in Singapore had ruled that India should share the costs with Vodafone. The government went in appeal against the arbitration, and Ms Sitharaman said that the government was contesting the issue of the sovereign right of the State to tax………”
The Cairn Energy case
The other case is that of Cairn Energy, which transferred its shares to Cairn India before listing on the market, and the Indian authorities demanded capital gains tax, and confiscated Cairn’s shares. Here too, the government had lost the arbitration battle, and it has been asked to pay back the shares of Cairn Energy that it had confiscated and sold, the dividend it had confiscated, and the tax refunds it had withheld. The government has agreed to pay Cairn Energy `7,900 crores.
Problem will not end
The problem of retrospective taxation, writes Venkateshwar Rao Jr “will not really end with the new amendment because the generally accepted principle behind the retrospective tax is that a transaction is carried out in a third country with the intention of tax evasion………
“The recent consensus on the global minimum corporate tax of 15 per cent that was reached at the G-7 summit a few months ago can perhaps be seen as a solution because it is intended to marginalise tax havens by making some tax payment mandatory. India has nodded its acquiescence to the new tax arrangement, though it will take a long time before it is formalised and legislated in every country. But to think that removing retrospective taxation will bring in greater foreign investment into India is economic naivete of the sublime kind.”
