 "Are multinationals being treated unfairly?")
Chairman, BMR Advisors
“The administrative actions must be reflective of the government’s wider policy framework, and dispel a feeling that multinationals are soft targets”
Last fortnight, the finance minister led several meetings with the investor community in key global financial centres – Hong Kong, Singapore, Frankfurt and London – as a precursor to presenting Budget 2013-14. A consistent message in his interactions suggested an unstinted endeavour to woo foreign investors by reiterating his government’s commitment to reform and revitalise an economy suffering its worst quarterly performance in a decade. The finance minister’s visit could not have been better timed, given the February economic calendar and a spate of recent announcements to accelerate the Goods and Services Tax and the deferral of the draconian General Anti-Avoidance Rules, besides being committed to a non-adversarial tax administration.
Regrettably, the euphoria of his well-intentioned statements doesn’t seem to translate into actions, since the administration back home continues to slam multinationals and their Indian arms with allegations of tax evasion and high-pitched tax demands. It is true the finance ministry team is not leaving any stone unturned to meet fiscal deficit targets, but the regressive approach in doing so is causing the country irreparable damage. Take the January 2013 notification of the Central Board of Excise and Customs to collect outstanding demands, disregarding taxpayers’ right to seek a stay of demand. At least four high courts in a fortnight have granted stays on that notification. I wonder how tax collection targets can be met when the target-setting was predicated on a growth rate of 7.6 per cent. Data suggest that tax collections have consistently outpaced growth in the past decade.
Last week, a multinational was greeted by a tax notice claiming that it miscalculated the pricing of share issue for infusing additional foreign investment (in its own 100 per cent subsidiary). Under the pretext of transfer-pricing regulations, the revenue department has proposed a multi-billion dollar tax adjustment on the valuation of share issuance. In another instance, an information technology (IT) major was coerced to pay $100 million in tax claims, though the matter is sub judice on the pretext that a stay of demand could result in “financial hardship and irreparable injury to the exchequer”.
These examples suggest a huge disconnect between India’s approach to foreign direct investment (FDI) and tax policy and the administration’s approach to tax collection, besides a breakdown of established processes in the income tax department. Should such un-concerted actions continue, the finance minister could be cornered to either rethink his strategy and/or demand greater accountability, if his efforts to attract FDI will come to nought. Employment is India’s biggest challenge and India needs investments to bridge the gap. In the present global environment, investors can be fickle-minded, and if India’s short-term approach is adversarial, global boards will be forced to review investment plans. The Economist feature “Doing Business in 2013” chose to skip India and include China, Sri Lanka, Nigeria and Indonesia in its listing of favoured nations. Isn’t that a wake-up call?
The growth in cross-border and transfer-pricing disputes has forced us to implement an Advance Pricing Agreement programme; it’s now imperative on the administration’s part to respond to policy objectives by treading the path of rapid bilateral and multilateral pricing agreements. India’s treaty policy requires an approach to embrace a mandatory arbitration clause in tax treaties for definitive resolution. This is borne out from a recent criticism by the US’ competent authority, which should ring an alarm bell for India to align its approach to the international environment of dispute settlement. This came on the back of representations made by the Silicon Valley Tax Directors Group, representing the world’s leading IT giants present in India, seeking commitments from the Indian and the US governments that they would not be subjected to unrelieved international double taxation, unanticipated tax demands and an unstable legal environment.
The need of the hour is to ensure that the actions of administration are a manifestation of the government’s wider policy framework, dispelling a feeling that multinationals are soft targets that would succumb to the pressure of paying such tax demands owing to their aversion to pursuing protracted litigation in Indian courts. With a fortnight left for the Budget, it’s time the finance minister and his team introspects and not retrospects.
These views are entirely personal
Former Member, Central Board of Excise & Customs
“There is a limit to bending backwards. Multinationals must play on a level-playing field with indigenous industries, instead of seeking special favours”
The thesis that multinationals are not being treated fairly has been raised by some of them, and not the majority. Where the accusation of unfairness has been expressed, it is mainly to extract more facilities from the government than what indigenous industry would expect.
The immediate provocations for believing that multinationals are being treated unfairly is the recent outburst from Shell India. The company was outraged at an Indian government order for payment of a huge tax bill for a capital infusion by the parent company to the wholly-owned Indian company. The management went to the extent of saying this demand contradicted the finance minister’s recent moves of welcoming foreign direct investment (FDI) to India.
But this outburst should not be taken literally. It is a case of righteous indignation caused by a wholly unjustified demand, which will impact Shell’s business and bog it down in court cases for a decade. The demand, in this case, is thoroughly unjustified, and a procedure for the Central Board of Direct Taxes (CBDT) rectifies such patently wrong demands. Merely asking Shell to move the court will unsettle its business for the next few years. In any case, at its worst, it is the fault of an office, and not of the government as such.
A more relevant example is the Vodafone case. There has been much debate on the fact that the overturning of the judgment by an Act would discourage FDI from flowing into the country. One must consider that the Supreme Court’s judgement is not based on sound logic, to say the least. Even Justice J S Verma, a retired Chief Justice of India, said Vodafone completes the trinity of infamous judgments of the Supreme Court. It is one of the three judgments that “are best forgotten or allowed to pass”. Justice Verma pointed out that it was against judicial discipline that the three-judge judgment in Vodafone bypassed a five-judge constitution bench judgment in the McDowell matter in 1985, which held that what you have to see is the substance of the transaction to determine the tax liability, and not merely the form of the transaction. The then finance ministry introduced retrospective legislation to amend Section 9 of the Income Tax Act, which provided for cases of income that are deemed to accrue or arise in India.
The legislative intent of this section is to widen the application, since it covers incomes that are accruing or arising directly or indirectly. The law was not only expressly clarificatory but even expressly retrospective. So, the amendment was quite legal.
The government is now reportedly thinking of doing away with the retrospective amendment. The General Anti-Avoidance Rules were also quite legal, and even after they had been watered down by the Parthasarathi Shome Committee report, their implementation is being delayed by two years to accommodate multinationals and attract FDI without questioning how the money comes in. All this is nothing but a conciliatory approach towards multinationals. If multinationals are still unhappy, then one has only to say there is a limit to bending backwards.
In fact, the government gives them favourable treatment. First, the ministry of corporate affairs has been helping multinationals. In the case of Sesa Goa, for example, the ministry has advised the Serious Fraud Investigating Office not to prosecute the company, since the case of undervaluation and overvaluation against them was not proved prima facie. Normally, they do not extend such help to indigenous industry. I have not seen any in the indirect tax department in decades.
Second, there is an apparatus of Advance Ruling Authority under the income tax, customs, excise and service tax laws that allows foreign investors to get an advance ruling in regard to their tax liability, which their indigenous counterparts cannot avail of. They have to face the usual process of running from pillar to post.
To conclude, multinationals must submit to local laws and play on a level-playing field with indigenous industries. They cannot ask for special favours. Usually they do not do so, and all multinationals should not be placed in the same bracket.
smukher2000@yahoo.com