Retro tax call off: Pragmatic decision, even if it was late in coming

Raghuvir Srinivasan | Updated on August 06, 2021

The realisation has finally dawned that the retro tax issue was damaging India’s credibility among foreign investors

It takes a lot to accept one’s mistakes. And, governments seldom do so even if they have a habit of committing them regularly. That’s exactly why the Centre’s move to nullify the retrospective tax amendment, introduced in the 2012 Budget by then Finance Minister Pranab Mukherjee, is commendable.

It took the NDA government seven full years after it first came to power, in 2014, to correct a wrong made by its predecessor government. What could be behind the sudden awakening?

Two things. First, the pressure brought on by Cairn Energy and Vodafone, especially the former, which filed cases to appropriate government property in various countries. And, second, the realisation, finally, that the retro tax issue was damaging India’s credibility among foreign investors.

Finance Minister Nirmala Sitharaman has alluded to this in the Statement of Objects and Reasons to the Bill, acknowledging that the retrospective tax amendment is a “sore point” with foreign investors. With foreign investments being important to get the economy quickly back on the rail post-Covid, the government had to act.

It’s a relief that the government chose pragmatism over vanity to put one of the most unsavoury episodes in India’s tax history to rest.

The option to contest the cases in different courts in international jurisdictions was always there, especially because the government has said in the past that the right to tax is a sovereign one and cannot be questioned.

It remains to be seen now if Cairn and Vodafone, and the others, accept the government’s terms and settle the issue amicably. They stand to lose interest on the monies due to them, which is not an insignificant amount, but it will be a misstep if they decide to contest this and not settle with the government.

For all practical purposes, the Centre may have already struck a deal with the wronged companies that they will withdraw the cases and waive the interest dues if the government drops proceedings and refunds the appropriated amounts to them. It is inconceivable that the government would have gone ahead with the amendment without such an understanding.

Even if Nirmala Sitharaman does not achieve anything more in her tenure as Finance Minister — and I’m sure there’s lots more coming — she will be remembered as the minister who corrected a wrong. Just as history will remember Pranab Mukherjee for the original mischief.

Published on August 05, 2021

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