The government’s proposal to do away with the infamous and regressive retrospective amendment is welcome even if it comes several years late. However, it will be small or no consolation for Vodafone Plc, which has now spent nearly a decade fighting this change in the law and whose Indian venture is on the brink of closure. Indeed, while the government claims that Indian tax laws will be predictable and the tax-rates will be low, it remains to be seen if this assertion gets a buy-in from overseas investors. Where is the guarantee the tax regime will stay this way and that tomorrow there won’t be another flip-flop?
Former finance minister Arun Jaitley had promised, during his tenure, the government would neither indulge in tax terrorism nor be adversarial, and will certainly not bring in retrospective amendments. However, the retrograde retrospective amendment—introduced under the watch of the finance minister in the UPA government Pranab Mukherjee—was not touched. However, it has taken the NDA government seven years to act. So far, the government had put on a brave face, consistently disregarding the various arbitration awards that went against it in these matters in overseas jurisdictions —Vodafone Plc and Cairn Plc, for instance—and asserting that it would appeal them. Against this backdrop, one wonders why the government chose to pull out the retrospective amendment from the Income Tax Act at this point. Was it the realisation that it stood to lose billions of dollars if the appeals were turned down?
While Cairn has been attempting to recover $1.2 billion arbitration award, Vodafone had challenged the Indian government’s $2.7 billion tax demand. Moreover, Cairn had received permission from a French court to seize assets of the Indian government in France; the move by the British oil explorer, in full global view, did not help India’s reputation and must have prompted some rethink. The government has, of course, brushed aside the suggestion the proposed seizure of assets had anything to do with the Bill; finance secretary TV Somanathan said as much in a television interview. However, it was not clear what exactly he meant when he said, in response to a question on the timing of the withdrawal, that there were some legacy issues that this government inherited and that it wanted these to reach a “logical conclusion” before overturning the retrospective amendment. “We have the right to tax, but we are choosing to do this,” the secretary said, adding that the time had now come to abolish the retro tax.
There is no doubt the NDA government has avoided substantive retrospective tax, but it has not been too successful in resolving tax matters, as the pile-up of cases shows. Nonetheless, this is perhaps a first step towards an easier, less-litigious tax regime. The amounts that have already been paid by the companies will be refunded, albeit without interest. The bulk of this (Rs 7,900 crore) will go back to Cairn Plc, in lieu of shares of Cairn that the government had sold. The Bill introduced in Parliament on Thursday proposes no retro tax will be applicable for indirect tax transfer of Indian assets made before May 28, 2012. To settle cases, must withdraw any demands and make no claims for costs, damages and interest. It is likely all the affected companies will opt to end the disputes. If that happens, the government would have saved itself a few blushes.