A thing of the past

A thing of the past

RETROSPECTIVE TAX

About a fortnight ago, the income tax (I-T) department sent a reminder notice to the UK-based Vodafone Group Plc to pay Rs 14,300 crore in tax dues and threatened to seize the assets in case of non-payment. Foreign investors have taken umbrage to it.

Vodafone termed this as an act completely out of sync with Prime Minister Narendra Modi’s promise “Retrospective tax is a matter of past... We are ensuring that neither this government nor future governments can open this chapter” made during India – France Business Summit in January, 2016.

Others opined this is return of tax terrorism, a phrase coined in the wake of a retrospective amendment in tax laws initiated by then finance minister Pranab Mukherjee from April, 2012 and a spate of notices issued by I-T under it.   

Meanwhile, presenting the budget for 2016-17, in a conciliatory gesture, Finance Minister Arun Jaitley offered a one-time dispute resolution to all those companies on whom demands are already pending under the 2012 amendment. Under this window, they can pay the tax (sans interest and penalty) which would give big relief to Vodafone and dozens of other similarly placed companies. But, they are not inclined to accept in the belief that even the tax is not legally due from them. Let us look at some facts. 

The amendment was made to nullify a judgement of Supreme Court [January, 2012] which declared untenable tax demand on a transaction in 2007 involving sale of Hutchison Whampoa (HW) 67% shares in Hutchison-Essar Limited (HEL) to Vodafone. Pertinently, the SC reversed an earlier judgement of Bombay High Court [September, 2010] which held that India had jurisdiction to tax capital gains made by the HW.

While, BHC justified its decision on the basis that the capital gains were made on assets in India, SC argued that since the transaction was conducted between two entities located offshore, no tax was due. The 2012 amendment brought clarity to the law to say that India has jurisdiction to tax such indirect gains. This decision of the then government was perfectly logical.    

All assets underlying the shares held by HW reside in India and company could enhance their value [read premium it got on their sale] because of these very assets. The key driving factors were opportunities for growth and increase in profitability made possible by growing demand – all happening in India. Therefore, tax claim can only be with India. To deny this will have grave implications.

In a globalised scenario where ownership of Indian companies/assets is vesting in MNCs located offshore and shares exchanging hands between them, India would forgo mammoth revenue running in several billions of dollars. This will also embolden Indians to incorporate companies in offshore jurisdictions and thus escape paying taxes in India. 

But, the problem arose because the then UPA government made this clarification/ amendment applicable with retrospective effect from April 2002. This was done with an eye on taxing all such transactions that were executed in previous years. This is what made the decision look aggressive and earned the Indian tax regime the dubious distinction of being “opaque” and “unpredictable”.

The Modi government wanted to get India rid of this tag. So, in the budget for 2014-15, Jaitley promised to refrain from bringing any retrospective amendment to tax legislation in future. In cases where retroactive demands had already been raised and matter was pending in court, the judicial process will be allowed to run its course.

Finally, he set up a high level committee in the finance ministry to carefully scrutinise any potential new demand to nip the problem in the bud.

Shell and Vodafone cases

The government has lived up to its commitment. There is neither any retrospective change in tax law (even GAAR-General Anti-Avoidance Rule has been postponed till March 31, 2017), nor any fresh demand raised under 2012 amendment. It has also not appealed against decisions of BHC in transfer price cases of Shell and Vodafone. That should be sufficient proof of its intent to make tax policy ‘predictable’, ‘stable’ and ‘transparent’.  

However, the Vodafone case under reference is on a different footing. Here, the demand is as per the law of the land as it stands today. The company [likewise others] could be exonerated from tax liability only when a further amendment is passed by parliament to remove the clause on retrospective application of the provision to tax indirect transfer of Indian assets. And, that is beyond the remit of the executive.

Caught in such a nuanced legal tangle, the present government has no other option. Revenue secretary, Hasmukh Adhia very aptly described the reminder to Vodafone as under: “The reminder notice is a routine exercise of sending collection notices to all those whose dues are not stayed by any court. The party can always approach assessing office with a request to stay the demand as per law. In case the assessing officer does not agree, party can go to the next higher authority and get a stay.”

Therefore, to brand present action of the Modi government as one of “tax terrorism” would be travesty of truth. While it is doing its best to redeem promise made by Team Modi/Jaitley, for relief in cases where demands are already pending and assessment orders passed [and these are not stayed by court] there is an urgent need for a political consensus to get necessary amendment enacted.  

Modi cannot run the risk of doing it through an ordinance as that could be misconstrued as government going out of the way to let MNCs go scot free. Therefore, what Jaitley has offered in this budget is the best it could under the circumstances. Vodafone and others will do well to grab this opportunity.

(The writer is a New Delhi-based policy analyst)

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