The income tax [I-T] department has sent a reminder notice to UK-based Vodafone Group Plc to pay Rs 14,300 crores in tax dues and threatened to seize the assets in case of non-payment. The revenue secretary, Hasmukh Adhia has described the notice as routine exercise of sending collection notices to all those whose dues are not stayed by any court. The party can always approach assessing office with a request to stay the demand as per the law. In case, the assessing officer does not agree, party can go to the next higher authority and get a stay.
Despite the clarification, foreign investors have taken umbrage to the notice and even opined that this is the return of tax terrorism, a term coined in the wake of a retrospective amendment in tax laws initiated by then finance minister, Pranab Mukherjee in 2012. The amendment was made to nullify a judgement of Supreme Court [SC] [January, 2012] which declared untenable tax demand on a transaction in 2007 involving sale of Hutchison Whampoa [HW] 67% shares in Hutchison-Essar Limited [HEL] to Vodafone. Pertinently, the SC reversed an earlier judgement of Bombay High Court [BHC] [September, 2010] which held that India had jurisdiction to tax capital gains made by HW. BHC justified its decision on the basis that the capital gains were made on assets in India, a stance overruled by SC which said no tax was due as transaction was conducted offshore.
Post-2012 amendment, Indian tax department has jurisdiction to tax capital gains made from a transaction on any asset located in India. This is the law of the land today. This position can change only when a further amendment is passed by the parliament. Till then, the government will have no option but to follow the extant rules. The action of the department in raising the tax demand and now sending a reminder has to be seen in this perspective.
Yet, the government is being lambasted for what Vodafone has termed as disconnect between Team Modi/Jaitely promising a “predictable” and “transparent” tax policy regime on the one hand and I-T issuing notices on the other. Others opine this is a deliberate move by a desperate government to boost revenue so that it can achieve its fiscal deficit target and hence, the alleged tax aggression. They also allege that extension of freeze by another 3 months on 10% shares of Cairn Energy Plc (CEP) – the British oil exploration and production company [in January, 2014, the government froze CEP shares to adjust against a demand of over Rs 20,000 crores towards tax on capital gains made on sale of its assets to Cairn India Limited [CIL] in 2006] and reminder notice now sent to Vodafone could not have been just a coincidence.
So, where does the truth lie? Can we believe [as claimed by foreign investors] that the present government is deviating from its commitment? Has tax terrorism resurfaced to haunt the investors again? Alas! none of this is true.
In his budget speech for 2014-15, Jaitely promised that first, government shall refrain from bringing any retrospective amendment to tax legislation in future. Second, where ever the tax demand was substantial and involved interpretation of law, a high level committee in finance ministry will arrive at a carefully considered decision instead of leaving it to officers in the field. Third, as regards cases where retroactive demands had already been raised and matter is pending in court, the judicial process will be allowed to run its course.
On all three counts, the government has lived up to its commitment. There is neither any retrospective changes in tax law [even GAAR [general anti avoidance rules] has been postponed by 2 years], nor any fresh demand raised by I-T under 2012 amendment. It has also not appealed against decisions of court BHC in the transfer price cases of Shell and Vodafone. That should be sufficient proof of its intent to make the tax policy ‘predictable’, ‘stable’ and ‘transparent’.
The instant case of Vodafone is on a completely different footing. Herein, the demand is as per the existing law. To blame the government for something that is beyond its remit is unfair. Moreover, its action in bringing an amendment [only way to address investor’s concern] will be viewed with suspicion as an attempt to benefit MNC at the cost of exchequer. It could even be hauled up by statutory bodies such as the Comptroller and Auditor General [CAG].
In a surcharged atmosphere over ‘retrospective’ application of tax laws unfortunately, the issue has not been debated on merit. This is how it goes: company A [offshore] sells its shares in company B [in India] to company C [offshore] resulting in capital gain to A. Now, the question is which country will have jurisdiction to tax the gain. In all fairness, it can only be India where B is located.
All assets underlying the shares held by A are residing within the territory of India. The company was able to enhance their value [as reflected in the sale transaction] because of these assets. The key driving factors were opportunities for growth and increase in profitability made possible by growing demand – all happening in India. Therefore, the tax claim can only be with India. To deny this will have horrendous implications. With Indian economy increasingly globalized, in a scenario where ownership of companies is vesting in MNCs located offshore and shares exchanging hands between them, we would have forgone mammoth revenue running in several billions of dollars. This will also embolden even Indians to incorporate companies in offshore jurisdictions and thus escape paying taxes in India.
Prior to 2012, there existed a loophole in the extant law that led SC upholding the challenge of Vodafone to I-T tax demand. The 2012 amendment plugged this loophole which would help Indian government getting taxes legitimately due to it. This is correction of a past anomaly to give a fair deal to India; but the irony is due to retroactive tag, it is being branded as tax terrorism.
Modi – government will have to navigate carefully [focusing more on effective communication strategies] to ensure that its genuine revenue interests are fully protected and yet our image does not get dented at a time when India needs foreign investment for sustaining high growth.