Finance minister Arun Jaitley has done well to send out a strong signal to companies by refusing to challenge—against the taxman’s wishes—the Bombay High Court’s judgment against the taxman in his cases against transfer-pricing adjustment of firms like Vodafone and Shell. While that is a good beginning, the fact that 2.67 lakh income tax disputes between the taxman and assessees still remain suggests the road ahead is a very long one. Since the finance minister’s position in his maiden budget, as far as cases involving the retrospective tax law were concerned, was that he would not challenge any decision given by a court or an arbitration tribunal, it is time to extend that argument to other cases as well. Since there are tens of thousands of cases where the taxman is in appeal against decisions that have gone against him—on average, the taxman loses 80% of the tax cases at the level of tribunals and high courts and 90% at the level of the Supreme Court—it would send out a very positive signal if the budget was to announce that the government would not go in appeal in these cases either; given the taxman’s success, the chances of any major loss if such a decision were to be taken are negligible.
Top accounting firms cite examples of global M&A deals where the India arm is discussed separately—most recently, in the case of Nokia, the tax dispute created a situation where the Indian manufacturing plant had to be kept outside of the global merger. The problem is that, in several cases such as the Shell and Vodafone ones, the judgments by Indian tax officials are so different from the global standards, investors are getting the jitters—which is also why one of the big signals the budget has to give is about what is to be done on GAAR and whether that will put too much discretion in the hands of the taxman. As FE reported earlier this week, while Cairn Energy Plc did a mere reorganisation of its global holdings in 2006—from one set of overseas subsidiaries to an Indian one, with no exchange of cash—the taxman issued it a notice asking it to explain why tax was not due on this. While such transactions do not attract tax since there is no change of ownership, the taxman still went ahead, and to add insult to injury, decided to attach shares owned by Cairn Energy Plc while, in the last one year, the taxman has not even issued the tax demand. While Cairn’s top brass has met the finance minister and the revenue secretary, no remedy has been offered so far. Imagine the plight of any global firm doing a business reorganisation that would involve, probably, any Indian subsidiaries. It is pertinent to remember, at this point, that few of the existing settlement mechanisms—Mutually Agreed Procedure (MAP), Advance Pricing Authority (APA) or Dispute Resolution Panel (DRP) have delivered any substantive justice so far. Many potential disputes have been put on hold with the government asking the taxman to go slow—many others like Cairn remain in limbo; IBM and Microsoft have pending cases going back to 2006-07—but until the law is cleaned up, and dispute resolution methods actually start working, investors are going to remain scared. Investors are not looking for a red carpet treatment when they come to India, they are looking for peaceful coexistence after they have come in.