During the last leg of UPA-II dispensation, there was a substantial deterioration in business environment leading to erosion of confidence in India. This not only dis-comforted foreign investors but also, prompted Indian companies to pursue their investment plans in foreign destinations.
Apart from a virtual policy paralysis and various approvals and clearances – especially environment and land acquisition – getting jammed, the investment sentiment received a big blow due to retrospective amendment in tax laws initiated by then finance minister, Pranab Mukherjee in 2012.
The amendment was made to negate a judgement of Supreme Court (SC) in Vodafone case which declared untenable tax demand on a transaction in 2007 involving sale of Hutchison shares to Vodafone. SC held that being exchange of shares between parties located outside India, Govt of India had no jurisdiction to collect tax.
Emboldened by this amendment and ignoring world-wide condemnation and protestations all over, the tax authorities in India went on a virtual witch hunt. They raised ‘retroactive’ demands on many similar transactions involving MNC subsidiaries operating in India and their parents.
The demands pressed on almost every big name viz., Nokia, Shell, Vodafone, Essar, HSBC etc were humongous involving tens of thousands of crores/billions of dollars. The then government was so much obsessed with revenue that it became totally oblivious of even the damage that it was doing to credibility of India.
The situation deteriorated to a point whereby India was termed as a country which does not respect the sanctity of contracts. Ironically, indiscriminate persistence with tax demands was not even serving the revenue interest either since these were challenged by aggrieved companies in the court.
In this backdrop, there was a great deal of expectation from NDA-government when it took charge in May, 2014. Encouraged by Modi’s good track record when he was at the helm of Gujarat and his business friendly image, industry hoped that the new dispensation would undo the wrong perpetrated by previous regime.
Six months down the lane, as we assess the performance of this government, it all goes to Modi’s credit that he has not disappointed the industry. Thus, even while presenting his maiden budget, finance minister, Arun Jaitely articulated three main pillars of what he described as a ‘non-adversarial’ tax regime.
First, he made it abundantly clear that the government shall refrain from bringing any retrospective amendment to tax legislation in the future. Through this categorical announcement, he gave a clear message to business community that present regime believed in long-term stability of the fiscal environment.
Second, government was giving clear instructions to authorities at the ground level that henceforth, they will be extremely circumspect while contemplating tax demands. Where ever substantive questions on interpretation of law are involved and revenue implications are substantial, they will consult a high level committee set up by CBDT (Central Board of Direct Taxes).
Third, as regards cases where retroactive demands had already been raised and matter is pending in the court, the judicial process will be allowed to run its course. The finance minister was thus giving a clear indication that unlike previous dispensation, present government will honour the verdict of the court.
On all three counts, government has lived up to its commitment. Thus, far from any adversarial changes in tax laws, it is working in consultation with industry to address grey areas, minimize scope for subjectivity and make tax regime ‘predictable’ and ‘certain’.
As regards demand in certain quarters that it ought to have brought in a legislative amendment (or even an ordinance in the interim) to undo the damage done by Pranab Mukherjee, the government has acted prudently by not dabbling in to this territory at this stage. This would have been perceived as the present dispensation going for an over-drive to help business groups at the expense of exchequer!
There is merit in proceeding with lot of care in this area. With all due respect to SC’s pronouncement in Vodafone case, a fundamental point to consider is that even though both the parties involved in the transaction are located outside India, the gain there from arises due to dealing in asset that resides in India. Therefore, to argue that Indian government has no jurisdiction at all to tax such gain may not be an entirely tenable position. Clearly, the issue requires thorough deliberation to examine all pros and cons including looking at legislation in other countries before government could even think of further amendment.
On pending court cases regarding valuation of transactions between MNC subsidiary in India and its parent (transfer pricing cases), contrary to apprehensions in certain circles (including media), the government has very rightly decided not to appeal against the judgement of Bombay High Court (BHC) in the case of Shell and Vodafone. It has gone strictly by the legal advise given by the Attorney General.
The government is also leaving no stone un-turned in complying with the third principle adumbrated by Jaitely. Thus, field formations in all commissionerates have clear instructions not to indulge in what he euphemistically describes as ‘tax terrorism’. The focus of tax man is primarily on broadening the tax base by bringing more persons and businesses within tax net for maximizing revenue.
It is also acting with alacrity in ensuring that the long pending constitutional amendment bill on Goods and Services Tax (GST) – a revolutionary reform measure that promises seamless inter-state commerce, reduces cost of doing business and substantially adds to GDP – is passed by the parliament soonest and comes in to effect by April 2016 after necessary ratification by state assemblies.
In a nutshell, the thrust of present government is to put in place a ‘long-term’, ‘stable’, ‘predictable’ and ‘non-adversarial’ tax regime to improve the ease of doing business. With this and all other steps viz., timely approvals and clearances, boosting infrastructure, fiscal consolidation and eee (efficient, effective and economical) – governance etc, it will succeed in making India an attractive investment destination and a manufacturing hub.