In recent times, foreign investors have viewed every action of tax authorities in India with suspicion. They have reacted to tax demand for past years with vengeance and in most cases, dragged the latter to court. In several cases, they even avoid Indian jurisdiction (for fear of losing the case) and have gone for international arbitration invoking bilateral investment protection agreements (BIPAs).
On a parallel track, they run high voltage media publicity which is even pushed to a point of branding India as an un-attractive investment destination and actions of I-T as ‘tax terrorism’. And, since we need foreign investment for development and building infrastructure, they get additional fuel in their armoury to intensify attack on the government.
True, in the wake of a retrospective amendment in tax laws initiated by then finance minister, Pranab Mukherjee in 2012 [this was done 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], the I-T had gone for witch hunt raising ‘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.
But, that was past. Ever since Modi took command in May 2014, the government has taken a number of initiatives to soothe the nerves of foreign investors. While presenting his maiden budget on July 10, 2014 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 statement, he was giving a clear message to foreign investors that present regime believed in long-term stability of the fiscal environment.
Second, government gave clear instructions to authorities at the ground level that henceforth, they should be circumspect even while serving notices and raising tax demands. Where ever the demand was substantial and involved interpretation of law, they were required to make reference to a high level committee in finance ministry for seeking guidance.
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. Thus, Jaitely gave a clear signal that unlike the erstwhile UPA – dispensation, present government will honour the verdict of the court.
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 e.g. Bombay High Court (BHC) in the case of Shell and Vodafone.
I-T has only pursued cases initiated under erstwhile UPA regime (a past legacy) for instance, demand raised on Cairn India Limited (CIL) for over Rs 20,000 crores being the tax on capital gains made by Cairn Energy Plc (CEP) – the British oil exploration and production company – on sale of its assets to CIL in 2006. This is very much consistent with the principles laid by Jaitely in July, 14.
Even as Modi – dispensation has gone out of the way to offer abundant ‘clarity’ and ‘certainty’ of the policy environment and also extreme care in execution and enforcement, foreign investors have continued with their belligerent stance. They have single-mindedly pursued the goal of how to avoid paying taxes by exploiting every possible loophole in extant law.
Ironically, they are assisted on a continuous basis by a battery of Indian tax experts and advocates. In the past, their well orchestrated plans were even stretched to a point of influencing the process of making laws in a manner such that loopholes/ambiguities creep in. And, whenever, their game plan get frustrated by hawkish eyes of I-T, they raise alarm and even go for international arbitration.
A stark example of their obsession not to pay legitimate taxes can be seen from the fall out of a decision announced by finance minister in 2015-16 budget not to levy MAT (minimum alternate tax) on capital gains made by foreign portfolio investors (FPI) from investment in securities. In his speech, Jaitley had proposed to rationalize MAT provisions for FPIs; profits corresponding to their income from capital gains on transactions in securities, which are taxed at a lower rate, would not be subject to MAT, he said.
This exemption was clearly intended to be applicable only prospectively from financial year 2015-16. Accordingly, I-T served show cause notices on FPIs for the ‘untaxed gains’ made for previous years. However, the latter contend that they are not liable to pay MAT even for previous years. In other words, they want to have the benefit of exemption retrospectively. This clearly smacks of double standards.
The stance taken by foreign investors is illogical, unfair, inequitable and inconsistent. While, on one hand, they take strong exception to levy of tax retrospectively on the other, they show no hesitation in asking for retrospective applicability of an exemption which is unambiguously intended to be prospective. It is typical case of ‘heads I win and tails you lose’!
Jaitely has rightly rebutted their completely untenable claims saying in a conference organized by CII (Confederation of Indian Industries): “An emerging economy (like India) that expects investment cannot really indulge in tax terrorism or aggressive tax policy. But, our fairness is partly misunderstood. The converse of tax terrorism is not (being a) tax haven,”
Undoubtedly, India needs foreign investment in its march towards achieving accelerated growth. But, this should not be construed to mean that the government will forgo its legitimate tax dues on the gains made by foreign investors from their operation here. Investment is a two way street where interest of both must converge. This spirit must be respected and in that sense either terrorism/ aggressive tax policy or tax heaven – to borrow Jaitely’s phraseology – is a totally un-just and un-acceptable scenario.
Foreign investors need get reconciled to a fair, equitable and consistent tax regime that Modi – dispensation is endeavoring to put in place and extend full cooperation by paying all legitimate taxes due to the government. After all, when India grows at a fast pace they will have opportunities for making more profits (net of tax) vis-a-vis a scenario where they pay no or less tax and growth suffers.
Moving on a track of mutual accommodation (instead of current confrontation course) will be a win-win for all stakeholders.