Though the government’s decision to not repeal the retrospective tax when it came to power two years ago was always unfortunate, prime minister Narendra Modi and finance minister Arun Jaitley came up with a solution which, though inelegant, could be workable. They decided that, while the retrospective tax would not be used again – letting it remain on the statue, though, meant the threat of use was not eliminated – the existing cases would be decided by the various courts, including arbitration ones, where the taxman’s orders were being challenged. And since the tax department challenges all judgments of courts, it was decided that no judgment/ruling would be challenged in future – by agreeing, in January, not to challenge the Bombay High Court’s rulings in the transfer pricing cases involving Shell and Vodafone even though they went against taxman, the Cabinet showed the government meant what it said. This was critical especially for foreign arbitration – both Vodafone and Cairn are in foreign arbitration against the tax department in their, respectively, Rs 20,000-crore and Rs 29,000-crore retrospective tax cases – since the rulings have to be enforced by Indian courts and that process can take decades. When, some weeks ago, the taxman issued notices to both Cairn and Vodafone on their retrospective tax cases and threatened to seize their assets if they did not pay up, the Modi-Jaitley peace formula looked under trouble, but the finance minister was quick to clarify that the notices were a routine function and had to be issued for all pending cases – he clarified that the companies were free to use the one-time settlement window offered in the Budget but could carry on with their arbitration if they so desired.
By deciding to challenge the Rs 3,200 crore Vodafone transfer pricing case – the tax department indicated this in a series of tweets on Wednesday night – it would appear the taxman has won the battle and opens up the possibility of the department going back to challenging each order that goes against it. In this case, the tax department has argued that ‘a substantial question of law has arisen on the issue of taxability of capital gains arising on the surrender of call option rights … Hon’ble High Court has held that surrender of option rights is not a transfer under the provisions of IT Act … This ruling will have adverse effect in many other domestic cases also. As such it has been decided to challenge the said ruling’. The tax department may well be right in saying that it could lose revenues if the ruling is not challenged, but surely this would have been considered when the Cabinet took a call to try and reassure investors? In each case in the past, the taxman has argued that the rulings need to be challenged since they will have a bearing on current/future cases – while the department was overruled by the Cabinet in January, it appears to have convinced the government that revenue considerations have to come first. That’s bad news for a government which is trying to reassure investors of its credentials.