Millennium Post

Tax terror on foreign firms

Tax terror on foreign firms
It is the story of the biggest tax ‘slap’ on a bunch of foreign companies who had been supposedly wooed by the UPA government to invest in India in the fields of high-tech, capital-intensive and employment-generating telecommunications, information technology, mobile phone handset manufacturing, hydrocarbon exploration, etc. The companies were lured by the seemingly liberalised foreign investment regime of the Congress-led UPA government, headed by its economist prime minister Manmohan Singh. UPA chairperson Sonia Gandhi’s most trusted prime minister left the charge of the important finance portfolio by turn with Palaniappan Chidambaram, a corporate law practitioner by profession, and temporarily with Pranab Mukherjee, a Congress veteran and a very successful finance minister under Indira Gandhi’s prime ministership in the early 1980s.

Under the UPA-II, the finance portfolio was primarily with Chidambaram, then given to Pranab Mukherjee, after the former was shifted to the home ministry following the 26/11 Mumbai terror attack, and back to Chidambaram when Mukherjee was chosen as the UPA’s candidate for the President’s job. While presenting the annual budget in 2012, Mukherjee took an amazing decision to amend the Finance Act retrospectively to slap a massive tax claim on Vodafone against the latter’s by-then five-year old offshore purchase in 2007 of Hong Kong-based Hutchison’s share in Hutchison-Essar cellphone company in India for over $11 billion and bring similar other transactions under the amended tax net. Telecom gear manufacturer Nokia of Finland, hydrocarbon explorers Anglo-Dutch Shell, Cairn India, a subsidiary of Scottish firm Cairn, and US-based technology giant IBM were the next big names to face the ire of the 2012 Finance Act.

To be fair to Pranab Mukherjee, now President of India, he was not the original author of the
Rs 7,990 crore transaction tax slap on Vodafone. The Vodafone-Hutchison deal was concluded long before he became the finance minister for the last time. It was the idea of the corporate and tax lawyer-turned union finance minister Chidambaram. Vodafone had immediately filed a case in Supreme Court challenging the tax notice since the deal was between two foreign entities on a foreign soil (Hong Kong) which does not come under the purview of Indian law although the Hutchison asset was based in India. The Supreme Court had in January 2012, before the presentation of that year’s national budget, ruled in favour of Vodafone holding that the transaction was not taxable in India and thus the company was not liable to withhold tax in India.

Soon thereafter, the Finance Minister chose to amend the Income Tax Act retrospectively to bring offshore indirect transfer of Indian assets (Vodafone like transactions) within the Indian tax net triggering a lot of criticism from the global investor community and seriously impeding the inflow of foreign direct investment. By amending the Income Tax Act, the UPA government practically challenged the Supreme Court ruling and exhibited a mindless executive arrogance. The fact that Mukherjee’s successor, Chidambaram did not reverse the decision despite severe criticism from international business community and governments and, instead, chose to set up an expert committee to advise the government on it, proved that he had endorsed the action.

Interestingly, the Shome committee recommended that the issue be kept in abeyance until 2016, probably to bury the matter under the carpet for some time. Mukherjee was clearly shouldering his predecessor Chidambaram’s legacy and probably did not have the courage to dump it even after the Supreme Court ruling on the advice of his finance ministry bureaucrats, mostly Chidambaram loyals, who might have convinced finance minister Mukherjee to amend the act. Incidentally, Vodafone had engaged Arun Jaitley, a political cum professional rival of Chidambaram, as its counsel to fight the case in the apex court and got favourable judgement, which the revenue department may have found it difficult to digest.

In the meanwhile, the Rs 7,990-crore withholding tax, penalty on transfer pricing, etc. accumulated to over Rs 27,000 crore as the total tax liability on Vodafone. If one takes similar tax liabilities on other foreign investors in India which entered the country through acquisition of existing corporate assets in India, the gross liability on them may come close to Rs 50,000 crore. Few can blame Union Commerce Minister Nirmala Sitharaman and her party for her branding the arrogant act by the UPA government as ‘tax terrorism’ that even tried to undermine a Supreme Court ruling. Sitharaman is also in charge of the departments of finance and corporate affairs as a minister of state reporting to Union Finance and Defence Minister Arun Jaitley.

While the Narendra Modi government wants to immediately combat the issue, essentially a product of executive arrogance, head on to instill confidence of foreign investors in India, Jaitley, busy with the preparation of 2014-2015 annual budget, has understandably recused himself from the matter pertaining to the Rs 27,000 crore Vodafone tax dispute delegating the task of righting the UPA’s wrong action to junior colleague Sitharaman. And, she acted promptly to facilitate the appointment of former Supreme Court judge R C Lakhoti as arbitrator in the tax case after receiving Prime Minister Modi’s consent. The Modi government is keen to project itself as fair and transparent in its taxation policy and practices to give right signals to investors, foreign and domestic.

Paradoxically, President Pranab Mukherjee outlined the new Narendra Modi government’s economic vision, while addressing a joint session of Parliament on 9 June last,  saying it would ‘embark on rationalisation and simplification of the tax regime to make it non-adversarial and conducive to investment, enterprise and growth’. The irony must not have been lost on Finance Minister Arun Jaitley for it was one of Mukherjee’s own decisions as the finance minister in the previous UPA government that not only sent shockwaves through India Inc but is also now perceived by many to have contributed greatly to the investor nervousness that followed during the subsequent
economic downturn.

Along with corporates, the BJP then rightly criticised the UPA government’s move, accusing it of indulging in ‘tax terrorism’ and saying the decision to lay retrospective claims chased away jittery foreign investors. The issue figured as a key discussion point at a recent meeting of corporate chieftains and finance minister Arun Jaitley, with the former calling for withdrawal of ‘non-adversarial tax regime’.

Even during the election trail, Narendra Modi had said the government shouldn’t take decisions with retrospective effects, adding that such actions ‘defeated the purpose’ of creating confidence in the economic system. With BJP and Narendra Modi now at the helm, the party certainly wants to walk the talk. In fact, seemingly happy Vodafone India had recently made it clear it would consider coming out with an initial public offering once the case was settled.
Nantoo Banerjee

Nantoo Banerjee

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