Retrospective taxation is a practice followed all over the world. There was no need for Finance Minister Arun Jaitely to announce, in his Budget speech, any dispute resolution scheme for companies that have avoided paying legitimate taxes.
Mr Jaitley said that the companies would get waiver of interest and penalty provided they withdraw all appeals against the Government in all judicial forums, including international arbitration.
Retrospective taxation was brought in by the UPA regime, thanks to a Supreme Court judgement favouring Vodafone. After the judgement, the Indian Government had no option but to follow international practice in such cases, ie, brining in retrospective legislation.
In the UK, where Vodafone is headquartered, the Government brought in retrospective legislation in 2012 that forced Barclays Bank to pay 500 million pounds tax and stop its ‘tax avoidance’ schemes.
Vodafone case is very simple. It is a case of tax avoidance when it bought Hutchison’s share in the Telco. When the Indian authorities raised tax demands, the company went to the courts and got favourable judgement.
The Supreme Court Judgment said that the way the deal was structured resulted in a tax avoidance situation and not evasion. There is a statement in the judgment that suggests we simply “look at” but not dissect and “look through” the facts.
It means that it is the Government’s duty to shut down all loopholes in the legislation and not that of the Courts. So the Government brought in the legislation.
Vodafone case is very simple. It bought Hutchison’s equity in Hutchison Essar limited in 2007. It didn’t pay any capital gain tax to Indian government. Vodafone claims that it has not made any capital gains. It is right.
Primarily, the tax is not due from Vodafone (the buyer), but from the seller (Hutchison). Vodafone’s crime is that it should have withheld the capital gains tax and paid it to the Government. Whether or not Vodafone withheld the amount can be found out by going through their books for provisions they must have made against such possible liabilities.
It is highly naïve to assume that Vodafone would not have withheld the capital gains tax amount, sillier to have assumed that none was payable.
Now the question is why Vodafone did not raise hue and cry when the Government in its own country was bringing in retrospective taxation. Why it is creating scene in IndiaIJ Is it because of maligned reputation of India being a banana republic that has a corrupt system and anyone can play around with itIJ
If India wants to attract FDI, it should not offer any ‘dispute resolution’ scheme to tax defaulters. It should be firm in its action and should not give a signal that India is a banana republic and anyone can play with its tax system.
Investors and foreign companies like stable regulatory and taxation regime and not a corrupt regime where it can survive without paying taxes.
(The writer is a Senior Journalist)