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    View: The great undoing: Retro tax is history

    View: The great undoing: Retro tax is history

    View: The great undoing: Retro tax is history
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    By Srivatsa Krishna   IST (Updated)

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    In the budget document of 2012, the then Finance Minister (FM) slipped in a stealthy googly, the retrospective tax amendment, without mentioning it in the formal budget speech which has come to haunt investor confidence in India for the past decade. It was an excellent clarification of tax policy and the sovereign’s right to tax – and not obfuscation- except for the retrospective part.

    In the budget document of 2012, the then Finance Minister (FM) slipped in a stealthy googly, the retrospective tax amendment, without mentioning it in the formal budget speech which has come to haunt investor confidence in India for the past decade. It was an excellent clarification of tax policy and the sovereign’s right to tax — and not obfuscation — except for the retrospective part. It brought about tax certainty — not uncertainty — by making it abundantly clear that if there is any asset sale abroad when the principal underlying business activity from that asset is in India, then they are subject to taxation here.
    Dark rumours abound about the motives behind the retrospective part of it, including corporate blackmail with a political motive for an upcoming major political event then, along with attendant helpful executive thuggery to make it happen then. Indeed, the current action could perhaps have been done a few years ago, before the French arbitration, but it always takes time for the political executive and permanent executive stars to align, which happened only recently! It is an open secret that Vodafone informally consulted the tax authorities about their possible liability before doing the asset transfer and they were clearly told; they could well be taxed with a reasonably high probability. Yet they went ahead taking a calculated business risk.
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    Vodafone after investing about $20 billion were told, we shall tax you from your grandfather’s time right up to 1962 — even though Vodafone PLC itself was in fact born only on January 1, 1985! Pursuant to these amendments, the Income-tax department has raised a demand of Rs 1,08,730 crores. (tax plus penalty) in 15 cases related to indirect transfer of assets. A total collection of Rs 8,098.12 crores has been made. In 2 cases, proceedings have been stayed by High Courts. Thus demands, have been astronomical, but actual collections were meagre. The “great undoing” of the toxic amendment is one of the boldest decisions and indeed a “great doing” of the Modi Government and should be celebrated.
    Let us not forget who the President was in 2014-15. If the Government had indeed moved the current undoing amendment, then it would have gone to then President, who in his avatar as FM had fathered the illegit retrospective tax amendment. It would have also left the ruling Modi Government open to the political criticism that they have given away the Rs.1 lakh crore tax demand raised by UPA, even before the arbitration award came, and thereby proving their silly and meaningless charge of theirs being a "suit-boot" Ki Sarkar!
    The decision is exceptional in many ways. First, it was done via a legislative routine not an executive route for the latter is always subject to misinterpretation and undoing in the future, whereas the former is both firm and certain. Further, a domestic legislative solution is far superior to resolving such an issue rather than through an arbitral award. Second, it sends a clear signal to boost investor confidence that we won’t do it ever again retrospectively but retaining the option to use it prospectively.
    Third, retrospective taxation has been used by UK, Germany, the US, Canada, and Australia have all previously used a sovereign power to counter tax abuse retrospectively. However, this power must be used responsibly and the consequences of such an action have also to be taken into consideration. Thus this ‘great undoing” is a historic step to correct a wrong of history and a signal to the world, that India is now, a place where rule of law prevails.
    Fourth, another positive aspect of the amendment is that it is not intended only for foreign taxpayers but also for Indian entities who were buyers of shares of foreign companies were also made liable retrospectively under the 2012 amendment for TDS and consequently were visited with tax demand and penalties for failure to deduct tax. These Indian companies shall also benefit from the proposed amendment as tax demand along with penalty etc shall also be withdrawn subject to fulfilment of prescribed conditions.
    Lastly, I am 100 percent sure that the Cairns/ Vodafone etc. will accept the offer, for any businessman who works on cash flows will prefer cash in hand today versus uncertain promises with the meta-unknowns of our system, tomorrow. Indian embassies and their assets abroad cannot be attached so easily due to immunities and privileges; let us assume for a moment that after 10 years of litigation they manage to attach a few Air India planes, will someone buy it from them? What will they do with old planes anyways, except making it a corporate jet in place of their existing swanky Gulfstreams?
    Only IAS officers like to secure arbitration awards on file but that’s of no use to a businessman, who prefers cash in hand. So, unless the CEO of Cairns Global is an IAS officer with the impending threat of CAG audit, they will grab it with both hands. They know fully well the risks of fighting a sovereign which can take a decade or more to fructify. Remember Enron which went to arbitration against the Government of India in London and came running back with its tail firmly between its legs to not just settle but also to reconfigure to restart operations which was one of the good wins of this current government? Thus, the “great undoing’ is one of the Modi Government’s boldest steps till date, and ought to be lauded by all right-thinking people, everywhere — including those who turned a blind eye to the creation of this mess in 2012. The Great Undoing has happened due to a rare, fortuitous alignment of various stars, including political boldness and sagacity. RIP Retro Tax.
    —The author is an IAS officer. Views are personal. He can be followed on Twitter @srivatsakrishna
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