Given how, even if you exclude the infamous R20,000-crore Vodafone retrospective tax demand case, transfer pricing adjustments have been rising dramatically, it was always difficult for investors to believe finance minister Arun Jaitley meant business when he said irresponsible tax behaviour would be reined in—transfer pricing adjustments, for instance, rose from R10,900 crore in FY10 to R70,000 crore in FY13 before falling off a bit to R59,000 crore in FY14. While refusing to strike off the retro law from the statute last July, Jaitley said the principle would be that, if a case was decided against the taxman by the courts, the government would not appeal it. By October, some of these cases went against the taxman, and while the attorney general advised against appealing them in the Supreme Court as the taxman wanted—appeals have been par for the course so far—the government not taking a decision unnerved investors. While Wednesday’s Cabinet took a decision on two Vodafone capital infusion cases where the taxman had levied a R1,300 crore tax demand—the Bombay High Court had ruled that since these were capital transactions, they could not be taxed —several other similar cases will also get resolved once the courts rule in their favour; in the case of Shell where a R6,000 crore tax demand has been made, the Bombay High Court has already ruled against the taxman. In a related move, both the tax boards have also instructed officials not to call in senior management of firms—without prior authorisation from higher ups—for routine tax investigations; the idea here being that all communication between the taxman and assessees must be in writing.
Another big reform move that took place on Wednesday was clearing the HDFC Bank proposal to raise R10,000 crore—pending for over a year now—as well as the sale of between 5% and 10% of Coal India’s shares. Apart from the fact that a 10% divestment of Coal India—the BSE notice says 5% shares are to be sold with a greenshoe option of a similar amount—will fetch the government a tidy R24,000 crore based on today’s pricing, the importance of the decision lies in the fact that Coal India’s unions have successfully put off such divestment during the UPA tenure by threatening to go on strike. The unions did the same this time around, and under greater provocation, since the government was also opening up the sector to commercial miners, including from overseas. When the Coal India strike was called off this month, there was a lurking suspicion the government may give in on both the issues of divestment and the opening up—Wednesday’s BSE notice makes the government’s intent clear on at least the first issue; the coming months will make the position clear on opening up the sector to commercial miners.