Income earned from assets in India is certainly liable to tax, but it is unfair on investors to perpetuate tax policy uncertainty
Former Chairman, Central Board of Direct Taxes
The retrospective amendments in the Finance Bill, 2012, to handle taxation of international transactions associated with Indian assets are steps in the right direction.
This is because it is the country’s legitimate right to collect tax from any international transaction associated with Indian assets, irrespective of the country where the transaction takes place or the residency of the companies associated in the transaction. The retrospective amendments have made this intent clear again.
The Explanatory Memorandum has rightly pointed out that there was a need to provide a clarificatory retrospective amendment to restate the legislative intent of the scope and applicability of Sections 9 and 195 of the Income Tax Act associated with such transactions, and to make other clarificatory amendments for providing certainty in the law.
It is clear law that if you earn income because of your business in India, you have to pay income tax in India. There is no ambiguity and no uncertainty in that respect. However, some people think they can create special purpose vehicles (SPVs) in any tax haven just by doing some paperwork, and shift Indian capital gains to those havens. They probably consider it a matter of right, and if someone challenges their right to avoid tax, they shout or grumble. Some people scream from the rooftops that India does not have adequate infrastructure and needs to invest trillions of rupees to create it, and transactions like this facilitate such investment. Others seem to think that it is not their responsibility to pay tax; instead, the government should somehow find the money to create infrastructure without building up a deficit. If everyone were allowed to escape tax, governance will collapse as it did in Greece. No doubt consultants, bankers and foreign institutional investors will then move on to a new market.
Is it fair that someone earns trillions of rupees and walks away without paying any tax at all — just because he has created tax haven SPVs? In my humble submission, fairness apart, Vodafone’s case was classically the right case for lifting the “corporate veil,” ignoring tax haven companies and levying full tax. In the circumstances, Parliament has no choice but to amend the law with retrospective effect. Normally, retrospective amendments are unjust and inequitable. But a retrospective amendment is indispensable and fair in this rare case.
Also Read
It may be useful to remember that Unilever globally acquired the holding companies Brooke Bond and Lipton. It necessarily meant that the ownership of Brook Bond India and Lipton India changed hands. That was a genuine global merger. However, the Indian income tax authorities did not raise a murmur. One could not even think of “lifting the corporate veil” in those days.
Hutchison’s transfer to Vodafone is the right case for doing so and for collecting the tax that is rightfully due to India. The government has given a clear message that tax avoidance will not be tolerated in India. Now there is clarity and certainty. Anyone who wants to do business in India, but does not want to pay tax in India is not welcome.
An entire series of retrospective amendments and general anti-avoidance rules (GAAR) provisions give this clear message. Finance Minister Pranab Mukherjee did well in a post-Budget interview when he clearly said foreign investment does not come into a country purely for low or zero tax; it comes for the size and depth of market.
Having said that, I would say kshama virasya bhushanam (powerful people pardon). Recover full tax from all tax planners, but on the recovery of tax, close the files. No penalty should be levied.
In all these discussions, the common man ignores a fact. Every time someone walks away without paying billions of rupees of tax, one of the following two things happen: (i) we, the middle class, end up suffering that tax burden, or (ii) if the government does not raise tax, there will be deficit financing — which will be borne by the poor people who do not even understand this controversy.
For some strange reason, the common man considers these tax consultants heroes and tax commissioners villains.
Joint Tax Leader, PricewaterhouseCoopers India
The purchase of overseas assets deriving substantial value from India is sought to be taxed retrospectively with effect from April 1, 1962. The question is not whether the sovereign power permits retroactive legislation, but how fair it is to legislate such provisions that impact businesses severely.
Section 9 is being amended to purportedly remove doubt. A step back would show that the matter of whether transfers of an overseas financial asset deriving its value from business in India was liable to tax was decided by the apex constitutional court in January 2012, less than three months before the Finance Bill was presented. A matter once decided by the Supreme Court becomes final; as such, the question of doubt is inconceivable. It is unfair to then consider that the matter requires a change in the legislative framework, unless the intention is to bring a new law to treat a class of transactions in a certain manner.
A cursory look at the way in which the amendment is proposed – by carrying it out not only in Section 9 but also in the definition of the assets, together with multiple other amendments – clearly shows that much was needed to legislate the new thinking that was stated to be only for the purpose of clarification.
Further, the language used in various amendments to give effect to this uses certain concepts that were not there in 1962. It is inconceivable to think that a concept that did not exist in 1962 was intended to have been present in our legislation.
In current times when the biggest challenge for businesses is to deal with the uncertainty of markets, economies and talent, it is worth considering whether at least the certainty is not taken away in respect of the tax cost of doing business. The apex court observed that, “Certainty is integral to rule of law. Certainty and stability form the basic foundation of any fiscal system. Tax policy certainty is crucial for taxpayers (including foreign investors) to make rational economic choices in the most efficient manner. Legal doctrines like ‘Limitation of Benefits’ and ‘look through’ are matters of policy. It is for the government of the day to have them incorporated in the treaties and in the laws so as to avoid conflicting views.”
There cannot be a doubt that the tax policy could and should address the issues and particularly deal with conflicting views to lend certainty. The important aspect, however, is to provide certainty in an effective and timely manner. There cannot be a situation of allowing the uncertainty to prevail until it becomes certain by the ruling of the apex court and thereafter seek to make retroactive amendments. Such retroactive amendments cannot but be treated as a new law to treat the transactions differently and, as such, making them retroactive by stating that it is for the removal of doubt does not make much sense to businesses even though the concept can be explained through profound legalities.
The present situation of a growing fiscal deficit requires additional revenue to support the government’s programmes. That may be the case but amendments to law made in the circumstances explained above cannot suddenly become fair only because there was a compelling need to raise revenue.
The matter gets more complex because businesses don’t see a stable policy. On one hand, tax policy, as apparent from the direct taxes code, is seeking to eliminate preferences, but in the Finance Bill we have over half a dozen tax preferences coming up. The dispute resolution panel was implemented to settle disputes without mushrooming litigation but, again, the need was felt to allow the decision of the three commissioners of revenue to be appealed against by the revenue department. It appears as though legislative proposals are made against the backdrop that deemed unacceptable the outcome of the panel of three commissioners and the outcome of three judges of the apex court.
How can businesses do their math in such circumstances? Suffice it to say that resorting to retroactive amendments puts businesses in a state of perpetual uncertainty, which is not desirable under any circumstances.