One step forward, two steps back

The “Achhe Din” promised by the current ruling dispensation at the Centre is proving to be a mirage. 

At a time when China’s economic growth has slowed down to a two-decade low, India should use this opportunity to attract investors to its shores. In reality, however, things do not look much better than the dark days of the previous UPA government.

After more than a year in office, businesses are grumbling about the NDA government’s limited progress, especially in key reform areas such as taxation — an issue that is back in prominence after UK-based Cairn Energy reacted angrily to an unexpected tax demand. Strongly contesting a Rs 10,247- crore tax demand raised on its eight-year-old internal business recognition, British oil explorer Cairn Energy on Tuesday said it will seek damages from the government for the loss in value of its holdings suffered because of the notice.

Cairn Energy is seeking compensation in a manner similar to Vodafone. The government had decided to join the arbitration initiated against the Rs 20,000 crore tax demand made on UK telecom major Vodafone and last month appointed Costa Rica-based international lawyer Rodrigo Oreamuno to arbitrate on its behalf. It seems like a case of taking one step forward and two steps back. The cases surrounding Cairn Energy and Cairn India are being watched intently, given the new government’s earlier promises to ease off targeting global multinationals over tax. Indian courts had also recently cleared up a handful of high-profile cases affecting businesses like Vodafone and Shell, hinting at a new business-friendly environment.

The real change in the country’s taxation system is yet to be seen. However, a lot of India’s problems are far bigger. The country is ranked a lowly 142nd out of 189 nations by the World Bank for ease of doing business last year — one spot above the West Bank and Gaza and well behind rivals in the BRICS group of emerging economies. In fact, Pakistan is far better positioned than its democratic cousin. In certain areas, like contract enforcement or construction permits, India has been placed much closer to the bottom, this year.

Even the 2015 FM Global Resilience Index has ranked India a low 119 out of 130 countries on an index that measures business resilience of nations based on economic, risk quality and supply chain factors, dropping seven notches from last year. In fact, earlier this year, Deepak Parekh, chairman of HDFC, noted a “growing impatience creeping in” from businesses who had seen little change “on the ground”.

India’s image as an investment destination continues to suffer despite the Prime Minister Narendra Modi’s repeated assurances to improve investor sentiment and the overall business environment. Even after two decades of economic reforms, India continues to falter on various sub-indices such as starting a business, dealing with construction permits, retrospective taxes, trading across the border, enforcing contracts and resolving insolvency.

The gap between India’s tax rhetoric and reality has become apparent to the many multinationals who have invested in the country. The NDA government, despite its focus on attracting foreign investment, has not yet provided one of the basic requirements for investments – a simple and consistent tax policy. Leading companies such as Cairn India, Vodafone, Royal Dutch Shell, IBM, Microsoft, Nokia, are being pulled into tax-related litigation in India arising out of the retrospective tax law - a 2012 amendment allowing taxation of indirect transfer of shares in the past. The retrospective tax law is being termed as one of the single biggest deterrents to investment in India. 

The general feeling amongst investors today is that the retrospective tax decision through a retrospective amendment is damaging investment sentiment.

While Vodafone has been fortunate, Cairn, for instance, was not as lucky. Though the case against Cairn India appears to be flawed upon several grounds, such as - the proceedings were initiated after a lapse of more than six years from the end of relevant FY 2006-07, whereas Delhi High Court and other <g data-gr-id="58">courts</g> have held that any such proceedings should be initiated within reasonable period of four years. Also, Cairn India cannot be penalized for expecting that it ought to have withheld tax by anticipating a retrospective amendment as there were no taxable gains and accordingly, no liability to withhold tax on date of payment.

To maintain its growth trajectory, India needs to be a relatively attractive investment destination across each of these parameters. But probably the first few things it can do is to demonstrate is intent by stepping in and doing away with its infamous tax-terrorism - a phrase used to describe the adversarial approach adopted by India tax authorities. A good starting point could be the high profile Cairn case.

By harassing corporates and investors, investor sentiments will only take a nose, dive. In the end, negative publicity and the new government’s failure to honour its campaign pledge will damage the country’s efforts to attract more international investment. The government has to decide whether this is really better than making a politically unpopular decision.