Retrospective tax: The spectre continues to haunt
The Union Budget in 2012 presented by the then Finance Minister Pranab Mukherjee was a watershed moment in the history of Indian tax. The Indian government, after facing defeat at the Supreme Court in a tax dispute with Vodafone, decided to change the Income Tax Act with retrospective effect to get even with the British telecom company. The case pertains to capital gains tax made by Hutchison Telecommunication International by selling its 67 per cent stake in Hutch Essar Ltd to Vodafone. All the companies involved in the transaction were based out of India and the transaction took place in Cayman Island.
Since none of the companies were based in India, the capital gains made by Hutchison Telecommunication was not liable to be taxed in India — an argument that Indian authorities did not agree as major operations of Hutchinson Essar was based in India. Indian authorities argued that Vodafone should have withheld the capital gains tax from Hutchison and raised a demand of Rs 8,500 crore tax. After calculating the interest and penalty, the amount of tax demanded from Vodafone came to Rs 20,000 crore.
When the courts quashed the tax demand, the government took the radical step of amending the tax laws with retrospective effect to make Vodafone pay the amount. The decision led to a lot of hue and cry and many multinational companies raised serious concerns over uncertainty in tax laws in India. The decision severely impacted the country’s image as an investment destination, almost derailing the country’s economy.
Retrospective tax — changing the existing laws to tax past transactions — since then has come to be known as one of the biggest hurdles in the growth of the county’s economy.
Vodafone tax dispute is not the only case of retrospective tax in India; there are many such instances when tax authorities raised demands for tax for past transactions. Vodafone case came to highlight because both the amount involved and the company involved were too big. The spectre of retrospective tax and uncertainty of tax regime continues to haunt taxpayers despite the National Democratic Alliance (NDA) government under Narendra Modi sending strong signals that it won’t resort to such hawkish tax collection methods.
The issue of retrospective tax again reared its head early this year with regard to Minimum Alternate Tax (MAT) on foreign institutional investors (FIIs). In its Union budget in 2015, while the government said MAT would not be applicable on FIIs from April 2015, it said that the past cases of MAT demand would be decided by the court. This statement stirred a massive controversy as FIIs feared they would be taxed for their past profits made in India.
Finance Minister Arun Jaitley further fuelled the controversy after he made a rhetoric comment on the controversy. Reacting to the MAT row, Jaitley had said “Let it be clearly understood that India is not so vulnerable that every legitimate tax demand can be considered as tax terrorism. We are not a tax haven and we don’t intend to be one.” This comment was not taken kindly by the FIIs and they started exiting from the country’s stock market fearing tax demand. This led to stocks market shedding 10 per cent within a span of a month between March and April.
The controversy was doused only when in September, the government clarified that MAT would not be applicable on foreign companies with no permanent establishment in India.
CAUSES AND SOLUTIONS
There have been similar cases in the past, and business communities believe that the root cause of such retrospective and adversarial tax demand is the attitude of tax authorities towards taxpayers. As one industry player recently quipped, “Taxpayers are seen with contempt that he is a tax evader, tax cheater and therefore, he should be treated with contempt.”
Ambiguity of tax laws in another reason for uncertainty in tax laws which lead to retrospective taxation. The government — both in the past and in the present — has tried to make tax laws simpler and remove uncertainties due to different interpretation of the law.
The drafting of Direct Tax Code (DTC) was one such effort undertaken by the Manmohan Singh government. The DTC was drafted to address the issue of ambiguity and complexity of tax laws, and replace the existing Income Tax Act.
Unfortunately, the code was never implemented in its entirety, though some of its provisions have been implemented. Now, with a new government in place, the DTC has been kept in the cold storage. The new government has also recently formed a panel to look into the issue of equivocalness of tax laws. It has been entrusted with the task of studying and identifying provisions/ phrases in the Act, which are leading to litigation due to different interpretations and impacting the ease of doing business. The panel is supposed to come out with its first report in January 2016.
However, not all tax experts and industry players are too hopeful of any positive change in the situation. As one industry player tells me “There’s no point in forming one panel after another unless the recommendations of the committees are implemented. You need a strong will power to address those issues.”
He reminds the government of the Parthasarathi Shome Committee suggestions on reforms of tax administration. “If some of the points in the Parthasarathi Committee reports were implemented, that would have been sufficient instead of forming a committee,” he says. Parthasarathi Shome Committee has suggested sweeping changes in tax administration in the country, the most important being changing the attitude of tax authorities from that of an enforcement agency to service provider.
It also clearly states that “retrospective amendments to tax laws should be avoided as a principle.” The committee observes that retrospective amendments have resulted in protracted disputes, apart from having deeply harmful effects on investment sentiment and the macro-economy. Now, it remains to be seen if the Narendra Modi government is able to keep its promise of no retrospective tax in India and if it is able to pass on the strong message to the tax officials working on the ground.