Retrospective taxation hurts not just foreign investment, it discourages domestic investment too
Whatever else our finance minister announces in his budget speech, one critical sentence is an absolute must: “ I hereby recommend to this august house that the retrospective tax amendment introduced several years ago by a distinguished predecessor of mine be withdrawn and repealed.” Incidentally, he could add another sentence for good order’s sake. “My distinguished predecessor Shri Chidambaram has gone public with his advice to me that I should have repealed this earlier and that he too would have repealed it, if he had the requisite votes.”
There is no way this issue can be ducked any more. The fact of the matter is that we will not be able to collect any taxes from Vodafone or from Cairn or from anyone else using this unjust and tyrannical law. We will lose the arbitration cases. Once we lose them, we will then proceed not to adhere to the arbitration judgments. This will once more reinforce our image as a lawless, whimsical and unreliable state. In the meantime, the intelligent and patriotic officials of our tax department will continue to issue notices threatening companies with seizure of their assets. One enthusiastic official might actually seize some assets. This will result in hundreds of millions of Indians losing their telephone connections. It will also result in a significant drop in domestic oil and gas production. It could easily bankrupt the government of the state of Rajasthan which receives thousands of crores of rupees in royalties and taxes from Cairn. It would definitely precipitate a great depression in the district of Barmer. An over-enthusiastic tax official might even arrest the CFOs of Vodafone and Cairn on a Friday evening. They will doubtless get bail on Monday morning. The real question is as to how this will play on weekend television regarding the business-friendliness of India.
I am sure that the finance minister already has on his desk several well-crafted bureaucratic notes and notings (I am yet to understand the difference between notes and notings) arguing the following:
* Repeal would be an insult to Indian sovereignty.
* India must never compromise on its sovereign right to tax retrospectively.
* We are only following measures against tax avoidance that are internationally-accepted norms.
* Vodafone and Cairn are making so much money in India that they will compromise and pay up something. They are not foolish. They will pursue their self-interest.
* Vodafone is a notorious tax-avoider in many countries. We must not let them off.
* Other investors do not care about these cases, especially because we have promised new investors that there will not be retrospective taxation.
* The Opposition will have a field day that the government has been “fixed” by Vodafone and Cairn.
* The Opposition will have a field day as we are making concessions to British companies. Remember, they still have our Koh-i-noor.
* Arbitration should not apply to tax cases.
All of these are fallacious arguments. They have the appearance of reasonableness which makes them seductive.
Retrospective legislation is first and foremost an insult to Indian citizens. Ambedkar and Rajendra Prasad were keen to ensure that India would be country ruled by laws, not by men, especially not by whimsical sultans, rajas, nawabs and palegars. For years, we have stood as a country that is in stark contrast to our northern neighbour where not just Australian MNC executives, but Chinese citizens have been harassed and arrested in a random manner. Are we going to be worse than China? This retrospective amendment has set us back 50 years. Despite any speeches that the FM or the PM may make, our credibility as a country will remain poor for a long time to come. This hurts not just foreign investment. It discourages domestic investment. The bureaucrats who write notes and notings supporting this measure are almost all planning to take up jobs in Singapore after retirement. Singapore is the true beneficiary of these and other silly laws on our statute books. And Singaporean bureaucrats do not use specious and spurious arguments about complying with international standards. They ruthlessly protect the interests of their own country.
Retrospective amendments may be justified as a clarificatory exercise where the earlier law had some vagueness. Incidentally, the argument that arbitration should not apply to tax cases is comical and defies elementary logic. Ninety percent of investment disputes hinge around taxes. If treaties do not cover taxes, then we might as well save money by not negotiating or signing them. No argument of sovereign right can or should be extended to a move that nullifies the judgment of the highest court in the land and at whose heart is a despicable lie—that in 1961, our parliamentarians envisaged this measure. This is a banal joke.
One last appeal, Mr Finance Minister. Please do it in the interests of sanity, justice, reasonableness, practicality and common sense.
The author is a Mumbai-based entrepreneur