Not being pro-corporate is one thing, but the government going the other extreme is equally bizarre
Finance minister Arun Jaitley is obviously right when he says the opposite of tax terror cannot be a tax haven. So just because India has the reputation of tax terror, it cannot scrap its legitimate tax demands either. That is a reasonable argument, but it does fly in the face of logic. After all, if the finance minister’s budget said that the minimum alternate tax (MAT) would not apply to FPIs, presumably this meant he thought there was a problem with applying it. In which case, it would have been an easy step for the finance ministry to supply this clarification to the taxman so that the tax notices were not sent out for previous years.
Both the finance minister and finance secretary Shaktikanta Das are technically correct when they say that the budget is prospective whereas what is being sought is a retrospective application. But the larger problem is that the government is simply too scared to be seen to be doing anything to help corporates even if it is legitimate, and wants to leave everything to the courts. Indeed, finance minister Jaitley indicated, at CII on Monday, that the FPIs were free to test the legality of the levy by going to court.
Ironically, this also suggests the finance minister thinks the taxman is broadly correct, but even before the infamous retro amendment, the poor track record of winning cases suggests the taxman has not been as even-handed as you would have liked. The ultimate example of how ridiculous several high-profile tax demands have been, of course, was the taxman viewing FDI by Vodafone and Cairn as something on which capital gains taxes could be levied, a stand the Bombay High Court just ruled against recently.
This attitude of the government is a far cry from when, after Narendra Modi won the election, he had no problem being photographed waving to the crowds on a plane with the Adani logo plastered prominently on it. While the government feeling the need to be less in-your-face with its views is comforting—getting SBI to sign an MoU with Adani for financing the group’s Australian project without any evaluation being done was a sign of the in-your-face attitude—it also needs to keep in mind the wildly anti-corporate ‘public opinion’ that it seems to be responding to is largely that shaped by an ignorant media and political parties that have been consigned to the trash can by the electorate. If corporates are providing jobs and causing GDP to grow, how can any government afford to ignore their legitimate needs?
Yet, the government has got so caught up in the need to not look pro-corporate, it is simply hurting business sentiment. Parliament, under the UPA, passed a retrospective tax law that it should never have passed, and despite realising the law was a bad one, the government refused to abolish it since, presumably in the NDA’s mind, this would have labelled it pro-corporate. It refused to intervene in the Cairn tax matter though, since it had set up a committee to look at cases where tax notices had not been issued, it could well have done so—the final Cairn tax notice was given several months after this committee was set up, so the case could have been brought up to it. As a result of the government refusing to intervene, Cairn has joined Vodafone and others in challenging Indian tax law—imagine the consequences of an international arbitral award that says India is guilty of expropriation by way of the retro tax amendment.
If this wasn’t enough, the government did not deem it fit to intercede in the Nokia tax case where, as a result, the Nokia plant had to shut down—it will be interesting to see how the plant can be reopened, as the prime minister suggested it would in Parliament, without the government intervening on the tax front. The government did not strike down MAT and DDT on SEZs though the original SEZ Act is clear no extra levies would be applicable to these zones—and this is despite the government view that SEZ/NIMZ are vital if India’s exports base is to grow.
The worst example of how ultra-cautious the government is, of course, is what happened in the case of the coal auctions. In the case of 4 coal blocks like Gare Palma IV/2, IV/3 and Tara, while there was no evidence of bid rigging, the government chose to cancel the bids since these were lower than others received. The government’s logic here is that, were the low bids to have been accepted, it would have been accused of favouritism. Once again, the government has left it to the courts to take a call on whether the decision was correct or not. If every major matter has to be tested in the courts, this is a policy paralysis of a different kind that the government is sanctifying.
Though it has been almost a year since the government was sworn in, it is the same not-pro-corporate image that, for instance, resulted in it starving the telecom sector for spectrum that resulted in prices going so high this will bleed the sector—had the government brought in more spectrum into the auctions, it could have met its target of transparent auctions without the spectrum bids going through the roof. Presumably, the sky-high bids prove the government is not pro-corporate. Jacking up mineral royalties so that they are way above those in competing countries may prevent meaningful exploration, but it will bolster the government’s image of not being pro-corporate.
In the case of the oil and gas sector, similarly, it is difficult to understand why no decision has been taken on the premium to be paid for exploration in the deep seas—it is true Arvind Kejriwal had attacked the UPA government when it was hiking gas prices, but surely one Kejriwal’s disapproval has to be weighed against the fact that exploration for gas has ground to a halt across the country? Given the way the government is functioning, it is natural to ask whether, when faced with a decision on whether to save an entire industry, the government would take the kind of call the Vajpayee one did in 1999 when it moved to revenue-sharing in telecom. Right now, the answer has to be in the negative.