In the Conan Doyle mystery story “Silver Blaze” there is a much-quoted piece of dialogue between Scotland Yard detective Gregory and Sherlock Holmes.

Gregory: “Is there any other point to which you would wish to draw my attention?”

Holmes: “To the curious incident of the dog in the night-time.”

Gregory: “The dog did nothing in the night-time.”

Holmes: “That was the curious incident.”

When the Modi government came to power, it was widely expected that the Centre would not only withdraw its tax case against Vodafone but also decisively reject any forms of retrospective taxation going forward.

The chatterati in Bangalore, Gurgaon and Mumbai were convinced that the ban on retrospective taxation was a slam-dunk choice. It would restore confidence and revive growth, but most importantly it was the morally correct decision and a necessary measure to prevent the outflow of foreign capital that would return India to the pre-1991 days. But no such measure was unveiled on July 10 when Arun Jaitely presented the budget — and that was the curious incident.

Fair-harbour friends

In modern free-market democracies politicians are widely believed to be craven and held hostage by special interest lobby groups. In India, they haven’t shied away from selling national assets such as spectrum and mining rights to powerful business interests for a pittance.

Why did the NDA government not exploit the Vodafone issue to its own benefit? It could have staked out the moral high ground and told the voter that it wished to undo the negative signal sent out by the previous government to foreign investors with the retrospective taxation case. At the same time, it could have extracted favours from other MNCs as quid pro quo for withdrawing cases against them.

This situation is not unique to India. Metal mines in Russia, lumber in Brazil and gas and oil in the US have all been exploited by corporations that have reaped unfair profits from assets that rightly belong to the public.

Taxation is the only way to ensure that corporations pay for the benefits of having a civil society with property rights, a fair judicial platform, a functioning monetary system and the protection of the armed forces. But corporations are like pirate ships. They will move domicile to wherever they can pay the lowest taxes while still reaping the benefits of operating in the free markets set up and maintained by other countries.

How do other countries and their politicians deal with this issue?

Many Western countries have historically benefited from the fact that MNCs have been headquartered on their soil. Microsoft, Qualcomm and Nokia pay most of their taxes to the US even though they should be paying a prorated portion of their taxes to India where they source their most important raw material — human labour.

Most recently a slew of companies from Medtronic to Burger King have moved their headquarters out of the US and overseas (Medtronic to Ireland and Burger King to Canada) to take advantage of lower corporate tax rates.

Though some may see this as a just come-uppance for the US, nevertheless it is part of a disturbing trend where countries (such as Ireland) are incentivised to follow a beggar-thy-neighbour approach by lowering their tax rates to attract MNCs that are conducting the bulk of their economic activities on foreign soil.

Largely ignored

US President Barack Obama has taken to jawboning, declaring those corporations “unpatriotic” that take advantage of the strategy of tax inversion. Senator Carl Levin and his Senate subcommittee on investigations have produced numerous damning reports highlighting the widespread use of tax loopholes by corporate America.

Strangely, even though politicians are crying foul the issue seems to be largely ignored by the larger public and the media even in as advanced a country as the US. The one country that has held a firm line both towards MNCs headquartered elsewhere as well as their own corporations is China. And arguably, it is the political elite and not the general masses that are driving national strategy in China.

So, what should India’s approach be? It is clear with a case such as Vodafone’s that the nation’s tax laws have been violated in spirit though not in letter. Most developed countries, such as the US, Canada, Australia etc., have general anti-avoidance statutes in place which are broadly framed and designed to prevent such violations.

In all societies regulation will tend to lag transgressions and MNCs with their highly paid lawyers and MBAs will always be a step ahead in finding loopholes to exploit. The only way to deter such freeloaders who are paying less than their fair share of taxes is to frame general statutes that cast a wide net. India is playing catch-up with its own GAAR laws set to be effective April 2015. In the meantime, the much maligned politicians of India are playing the role of watchdogs that look out for the public interest by not giving the Vodafones and the Nokias of the world a free pass. And in this they are absolutely doing the right thing because the spectre of capital flight is way overblown — any MNC that chooses to leave India, soon to be the third largest economy on the planet, does so at its own loss.

The original paradox

But this takes us back to the original paradox which seems to be a topic worthy of study by freakonomists. Why is it that in these instances it is the politicians who are looking out for the greater good while the general public and media are on the side of the MNCs?

To be fair, the average Indian taxpayer is largely ignorant of these cases while the pro-western English media and elites of Bangalore, Gurgaon and Mumbai who are on the payrolls of the MNCs are putting their personal interest and that of the society to which they wish to belong above that of the society to which they actually belong.

A number of theories abound but prominent among them are two. The first holds that since India is running a huge fiscal deficit the politicians actually need the tax revenue to run the country and hence their forced honesty. The second, that this period of seeming sanity is only temporary and that once Pranab Mukherjee, a crusader for the cause against Vodafone, steps down as President, all tax debts will be forgiven. In either case, one cannot depend on politicians to bark and in the long run; one can only hope that the general populace becomes aware of the dictum that the price of liberty is eternal vigilance and supports the efforts to pursue and prosecute tax evading MNCs.

The writer is a professor at Northeastern University, Boston

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