To make India investment-friendly, the govt must learn from its mistakes

While the nation is debating the effects of the stimulus package that the government has rolled out to counter the impending economic crisis, the Hon’ble Supreme Court settled a long court battle that it was fighting against various industries, over the abrupt curtailment of tax benefits promised by the government in the North-Eastern States and the Kutch region of Gujarat. The court held that the government could, at any time, withdraw a benefit if it is of the opinion that the benefit was misused against public interest. With these solemn words, the apex court allowed the government to withdraw the benefits.

Way back in 1999, the government, with the intention to promote industrialisation in the above areas, released an industrial policy and issued a series of notifications granting complete refund of excise duty, which encouraged businesses to set up manufacturing units in these areas. The benefit was time-bound for a period of 10 years from the date of commencement of commercial production. The policy and the consequent notifications gave the necessary impetus to economic development, with the establishment of a large number of labour-intensive manufacturing units in such areas.

Premature withdrawal

However, before the units could avail the promised, the Government curtailed their extent on grounds of large-scale tax evasion taking place by a few clandestine dealers who were allegedly operating bogus units in these areas. The consequence was that even those units which were operating honestly, and contributing to the growth and development of these areas, were left in the lurch.

It will not be inappropriate to say that many multinational corporations and major global players had set up units in these areas, and the withdrawal of the benefits led to the collapse of their costing and valuation strategies, which were aligned with the government’s commitment to full waiver of taxes. When the notifications curtailing the benefit were challenged, the high court in fact held that this violates the promise held out by the government to the industry, and hence should be quashed. The government challenged the orders of the high court before the Supreme Court, which upheld the notifications as being valid and held that the withdrawal of benefit was legally permissible by the Government.

What makes this ruling important is that it comes at a time when the government is aggressively trying to pursue investments into the country. The policy of 1999 was also brought under similar circumstances (massive earthquake in Kutch, and economic disparity in hilly areas and north eastern region due to the remoteness of the areas).

Present paradox

The ruling of the apex court and the stand of the government to attract investment indicates a paradox. While the global investment sentiment is veering against China, and India is desperate to attract such investments, the government must analyse its own inconsistencies in the past, such as withdrawal of promised tax benefits, which severely hampers the investment climate in India. While the courts are clear that law does not prevent the government from changing its stand on benefits, the government must be conscious that in future, such investors should be assured of a stable tax regime and must not have to go to courts to fight for the benefits which were otherwise promised to them.

The present times have seen the Indian government aggressively easing laws and regulations. A lot of State governments are easing regulations for the benefit of the existing industries as well as to attract new ones. It will be pertinent to mention that most of the issues on premature withdrawal of benefits by the government end up in courts one way or the other, and the present situation necessitates a mechanism which ensures that such disputes do not end up as protracted litigations. It may also be noted that in past, the government has set up committee(s) for settlement of benefit claims in hilly areas such as Uttarakhand, but their decisions have further been challenged before the high courts.

The strength of a robust economy lies in the confidence that the investors have on the commitments made by the government. The government must understand that the act of withdrawal of commitments is sharply being examined by the world at large, and not only make effective reforms but ensure effective dispute settlement for the investors in India.

Lakshmikumaran is Partner and Bhattacharya is Joint Partner, Lakshmikumaran & Sridharan Attorneys

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