FE Editorial : Taxing FDI

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The Financial Express: Feb 06 2013, 01:26 IST

When Shell’s India chairman says the taxman’s latest demands on the company are “in effect a tax on foreign direct investment”, she is only voicing a sentiment that is increasingly being echoed in boardrooms of subsidiaries of MNCs located across the country. Going by the taxman’s allegations, Shell India sold 8.7 crore shares to its parent Shell Gas BV at R10 apiece in 2009 while the actual value of the shares should have been Rs 183 each. Apart from the fact that Shell India says it complied with all the rules on valuing the shares, there are several apparent problems in the manner in which the taxman has applied the transfer pricing rules under which Shell India is now being asked to shell out back taxes and penalties. For one, even if you assume the shares were undervalued, there can be no evasion of capital gains tax till the shares were sold by Shell Gas BV; two, since issuing shares to a parent firm cannot possibly be seen as the main business of Shell India, it’s not clear how transfer pricing charges can even be levied. More important, even if you assume the taxman has a reasonable response to these issues, the structuring of the sale could have been done differently with no tax payable, even going by the taxman’s calculations. Shell India, the taxman says, issued 8.7 crore shares at Rs 10 apiece and got R87 crore instead of the R1,592 crore it would have got had it issued

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