By Nantoo Banerjee
It is a situation India wished it were never got itself in. The retroactive tax liability provisions in the country’s 2012-13 annual budget have already caused enough universal embarrassment to the government. The country’s proposed tax laws with regard to mergers and acquisitions (M&A) have been criticized and condemned by the global business community and financial institutions not merely for the contents to codify them, but the spirit and intent behind the written statement. Global business councils, including those from the United Kingdom, the United States and the European Union, have threatened to take the concerned issues to international arbitration.
At least two finance ministers – British Chancellor of the Exchequer George Osborne and US Secretary of the Treasury Timothy Geithner – have directly taken up the matter with India’s Finance Minister Pranab Mukherjee. All eyes are now set on the passing of the finance bill 2012-13 with or without these tax provisions. About a dozen US business organizations had approached Secretary of State Hillary Clinton to take up the matter officially with India’s foreign minister and prime minister during her latest visit to New Delhi. It is to be seen if Pranab Mukherjee finally blinks and takes back the tax or at least its retroactive provisions. Of course, such a measure will certainly cause further embarrassment to the UPA government and raise strong criticism from opposition parties, especially BJP and the Left, in Parliament.
It seems the whole thing was a handiwork of a bunch of over-jealous government taxation experts who had apparently convinced the finance minister to include these tax provisions in the budget with an immediate intention to recover Rs. 40,000-crore (US$8 billion) ‘capital gains’ tax demand on Vodafone plc of the UK, following its acquisition of India business from the Hong Kong-based Hutchison group. Hutchison Whampoa is controlled by a Cayman Island-based company. Vodafone plc had been earlier turned down by the Supreme Court of India as ultra vires under the existing law. The government had moved a fresh appeal or review petition before the Supreme Court against the judgement. At the same time, it decided to amend the Income-Tax Act, 1961, through the current year’s finance bill with retrospective effect, to catch Vodafone or, maybe, also a few others. The international business community is highly concerned that the new finance act would arm the government open many old cases of overseas acquisition of Indian business assets held by foreign shell companies.
A sum of $8 billion is not a small amount either for Vodafone Plc or the Government of India. Some loopholes in the Indian taxation act may have helped Vodafone plc make a killing by avoiding the capital gains tax and made the Indian government lose huge revenue. But, that is the name of the game. One pays for the mistake, and the others reap the benefit. The government is within its right to change the law. But, what is objected to by the international business community is the retrospective effect given to the proposed new law empowering the government to reopen old foreign M&A cases, pertaining to the acquisition of business assets inIndia.
Foreign entities have reasons to fear. They are bringing heavy pressure on their governments to make India see the folly of bringing about such a retroactive law. This will certainly have an adverse impact on future foreign direct investment inIndiaon account of unreliability of Indian laws and regulations. It is the government’s relaxation of FDI rules in the telecommunications sector that made overseas corporate investors swarm into the country in the lucrative telecom business.
The most vocal group against India’s proposed retroactive tax laws are the powerful US lobby, led by the Securities Industry and Financial Markets Association (SIFMA), the Financial Executives International, Financial Services Forum, Information Technology Industry Council, Investment Company Institute, Managed Funds Association, National Foreign Trade Council, Software Finance & Tax Executives Council, TechAmerica, US Chambers of Commerce, US Council for International Business and the US-India Business Council. These business bodies believe that if enacted, the proposals will have a significant negative impact on member companies operating in India, their customers and shareholders, and investment in India. Specifically, provisions such as an unprecedented period of retroactive tax collection, a broad and unclear general anti-abuse rule (GAAR) and an onerous tax on indirect stock transfers, are inconsistent with international tax policy and standards, and result in significant erosion of the rule of law, they point out.
In their letter, the Associations noted that, “A predictable, transparent and internationally consistent tax regime is imperative for companies operating in India, and is a critical component of attracting long term investment. We believe that the implementation of these provisions will have immediate and severe consequences for companies, affecting the willingness of companies to commence or continue their operations in India.” They are strongly opposing amendments proposed within the Indian Finance Bill 2012 that would change India’s Income Tax Act of 1961.
Their letter to the US treasury secretary said that the Finance Bill which would be debated in Parliament this month “includes two dozen amendments that would retroactively create tax liabilities, some for periods up to 50 years” and said it had a number of industry specific concerns “including the inappropriate expansion of the definition of royalties for computer software and for transmission by satellite, cable, optic fiber or similar technology, and the lack of clarity on the status of participatory notes.” Clearly, the international business community has taken the opportunity to add new issues to the retroactive tax law to put the government under further pressure.
It does not look like Vodafone plc making a meek surrender to the government demand too soon. Its legal battle against the government of India may go on for years. The chances of the government winning the case before international arbitration are simply dim. Yet, it is unlikely that the government’s taxation and tax law experts, revenue department bureaucrats, who are responsible for the controversial budget provisions, will back out at this stage. They have been always trigger-happy, no matter if their bullets miss the bull’s eye by a mile or more. Former Prime Minister Vishwanath Pratap Singh, who during his earlier stint as union finance minister unleashed a raid raj at the behest of his trusted bureaucrats, had put scores of business houses into deep trouble for alleged tax evasion of huge amounts.
ITC Limited, the multi-brand tobacco-to-hotel conglomerate, was slammed with an excise tax evasion notice of Rs. 803 crore in the mid-1980s. The amount was close to the company’s net annual turnover, then. ITC’s stocks crashed sending panic among the company’s shareholders. Small investors incurred huge losses. The case went on for almost 15 years bringing little benefit to the government. Finally, nothing happened to ITC. The Supreme Court turned down the government appeal in 2004. Where were those bureaucrats and taxation experts and their trigger-happy finance minister, then? Interestingly, ITC has once again been ‘booked’ by the revenue department for alleged central excise and service tax evasion to the tune of Rs. 13,620 crore in 2011-12.
Of course, there is no similarity between domestic tax evasion and capital gains tax avoidance by foreign firms in overseas M&A deals to take over business assets in India. Overseas transactions are not governed by domestic laws which have jurisdiction only over India. If the government loses its face on the retroactive tax issue in the 2012-13 budget, those so-called experts and legal advisors responsible for the act deserve to be exposed and adequately dealt with under law for wrongly advising the finance minister. (IPA Service)