Tax Tussle: Sending the wrong signal?

K. R. Srivats |KR Srivats & Amiti Sen | Updated on: Jan 03, 2021

TAX Word with Tower Crane - White Background - 3D Rendering | Photo Credit: porcorex

Companies and trade bodies believe the government’s stance on back taxes could be an investment dampener

The ongoing retrospective tax tussle between the Indian government and Vodafone and Cairn Energy is proceeding like the ongoing seesaw India-Australia cricket test series. With The Hague Court giving an arbitral award in favour of the oil explorer last month and Vodafone four months ago, it’s even-steven right now in the protracted case that has, since 2012, seen the verdict go one way and then the other.

In a fiscally challenging Covid-19 hit world, India may be loath to give up its claims of about ₹ 22,000 crore and ₹ 10,250 crore on Vodafone and Cairn Energy respectively and will be tempted to fight for every tax dollar through appeals, but it may be the time to make a break from retrospective legislations.

Uncertain climate

Ever since Pranab Mukherjee, finance minister in 2012, introduced the retrospective amendment to the Income Tax act, impacting Vodafone which had acquired the assets of Hutchinson Telecom in 2007, and thus came into the capital gains net, foreign investors say they have become watchful.

Jayant Krishna, Group CEO, UK India Business Council (UKIBC), said from 2012, the retrospective taxation policy had proven to be a dampener to India’s inflow of foreign capital. “The uncertainty triggered by the retrospective taxation issues between British conglomerates Cairn and Vodafone and the Indian government has continued to bring in a sense of discomfort within the UK business community, and this needs to be resolved rapidly in order to boost investment sentiments and attract higher Foreign Direct Investment (FDI),” he said.

Nisha Biswal, President, US India Business Council, said the BJP had opposed retroactive taxation, calling it tax terrorism. “The Council has appreciated and supported this sentiment as it believes regulatory stability and predictability are critical attributes for any country seeking to attract foreign investment as they help companies manage risk and assess potential returns on investment,” she said.

Economy watchers stressed the upcoming budget could be a good opportunity for India to reorient its ‘inherited’ course on retrospective taxation.

A time for change

“Retrospective taxation is almost an oxymoron. It is not only iniquitous but also retrograde. The NDA government is having to pay for the sins of the UPA, but it is a ‘prospective’ price to give India a fighting chance to be a serious investment destination,” said Sandip Ghose, former COO at Birla Corp and now a Corporate Strategy Advisor. He felt the government seeking an appeal to The Hague ruling in the Cairn matter would look like a “self-goal”.

A counterview by a Delhi-based tax lawyer, however, was that India could not be allowed to become a tax haven just to attract foreign investments. He cited how Mukherjee had, while introducing the retrospective tax provision, expressed confidence the country would attract investments despite tough global economic conditions — a trend that is now playing out in the post Covid-19 world.

Ashok Haldia, former Managing Director of PTC India Financial Services, said, “There is no denial that legal and regulatory certainty and predictability are quintessential for inflow of foreign investment and a lot more needs to be done in India in this direction.” But this did not take away India’s sovereign right to tax or determine its tax policy. “The tax laws aim at plugging transactions which are structured to avoid tax liability. The government’s actions should be viewed from this perspective. The investor should be wary of the risk involved while structuring investment deals.”

But in the race to attract global investments, including those by investors wanting to relocate from China, India needs to weigh its options carefully. A representative of a foreign company cautioned that India could lose the opportunity of emerging as a viable alternative to China if it did not squarely address the issue of retrospective amendments. “Not only should the Indian government accept the arbitral awards of The Hague Court, but also rework the legal enactments to bid adieu to retrospective taxation,” he said.

Published on January 03, 2021
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