By introducing amendments to the Income-tax Act on Thursday, the government has cleared the path for the withdrawal of all retrospective tax demands. It’s a laudable decision, for the 2012 retrospective taxation law not only adversely affected India’s capacity to attract foreign investment but also damaged its reputation, with international courts allowing seizures of Indian properties abroad.
This move will bring relief to 17 companies against which tax demands amounting to Rs 1.10 lakh crore were raised. The government has also decided to return around Rs 8,100 crore it collected from the companies, much of this, Rs 7,900 crore, to Cairn Energy.
The sordid saga of retrospective taxation, however, began with the famous Vodafone case. Vodafone bought Hutchison’s mobile telephony business and other assets in India in 2007, on which the Indian government demanded Rs 7,990 crore in capital gains and withholding tax from Vodafone. Vodafone legally challenged the demand notice, and won the case in the Supreme Court in 2012.
The matter should have ended there, but taxmen managed to convince then finance minister Pranab Mukherjee to disregard the highest court of the land and undo its ruling by bringing in an ordinance—which he did. The late statesman had many virtues but international taxation was not one of them.
While the move to do away with the obnoxious legislation is welcome, it seems to be a result of compulsion rather than choice. Apparently, it has been made because the government feared that its assets abroad could be seized by Cairn, which fought and won its case against India in international courts. Revenue Secretary Tarun Bajaj put on a brave face, though. He told a news channel that it is “unfair criticism to say that we have done this under pressure because of Air India assets being claimed … This would have been a long battle, but we decided for the best interests [of all] and investors.”
ALSO READ | Cairn Tax Dispute Exposes Major Shortcomings in India’s Economic Policy
More important than the government’s motive is a question: why did it take so long to do away with this irrational and insidious law? Mukherjee justified his action in his memoir The Coalition Years (1996-2012): “What foreign investors need is certainty in tax laws and not a tax-free environment, which no emerging economy can afford. I was convinced that this certainty of payment of taxes needed to be embedded in our tax policy.”
The justification would have made some sense, but the fact that the Supreme Court had invalidated the government’s case in 2012 made the retrospective provision obnoxious. If a government disregards its own top court, how could it expect to convince anybody to invest in the country?
Retrospective taxation was widely opposed, including those within the ruling dispensation. “[Prime minister] Manmohan Singh was convinced that the proposed amendment in the IT Act would impact FDI inflows into the country,” Mukherjee wrote. Further, “Sonia Gandhi, Kapil Sibal and P. Chidambaram also expressed the apprehension that the retrospective amendments would create a negative sentiment for FDI.”
In short, the most important people in then ruling coalition, the United Progressive Alliance, were against the proposal, and yet Mukherjee was able to get the amendment through. Worse, retrospective taxation continued even after the Bharatiya Janata Party, which had been blaming the UPA for “tax terrorism”, rode to power in 2014. Such is the hold of irrationality on economic policy.
This hold is the result of the machinations of the deep pink state—that is, the policy and decision-makers wedded to the ideas of socialism and statism. Decades of socialism has transformed the Leviathan into a deep state. Unlike in a conventional sense, however, India’s deep state is impersonal; it is not about a set of entrenched people but an institutionalized mindset which is innately anti-business.
The anti-business attitude pervades the corridors. So, it was unfortunate but not very surprising that the current regime accepted the logic proffered by Mukherjee and seconded by entrenched statists. The force of events seems to have defeated them.
So, Finance Minister Nirmala Sitharaman explained the rationale of the Bill to repeal retrospective taxation: “In the past few years, major reforms have been initiated in the financial and infrastructure sector which has created a positive environment for investment in the country. However, this retrospective clarificatory amendment and consequent demand created in a few cases continues to be a sore point with potential investors.”
She went on to add, “The country today stands at a juncture when quick recovery of the economy after the COVID-19 pandemic is the need of the hour and foreign investment has an important role to play in promoting faster economic growth and employment.”
While the government’s endeavour to take care of the sore point is welcome, it would be naïve and sanguine to assume that this decision alone will make India an attractive destination for investment. For the statist attitude persists everywhere, and this creates problems.
Consider the contrast between personal protective equipment (PPEs) and COVID vaccines. When the coronavirus crisis began, India had an acute shortage of PPEs. Thanks to the enterprise of businesspersons, the country was exporting PPEs. According to an August 2020 government notification, “… the revised notification of the Director General of Foreign Trade (DGFT) in July 2020 permitted export of PPEs. As a result of this relaxation, in the month of July itself, India exported 23 lakh PPEs to five countries. These include the US, the UK, the UAE, Senegal and Slovenia.” This happened because there were few restrictions on PPE production.
In the case of COVID vaccines, however, there is a price cap, which is the main cause for shortage of jabs.
In a nutshell, repeal of retrospective taxation should be complemented with other reform measures. Only this will convince investors to take India seriously.
The author is a freelance journalist. The views expressed in this article are those of the author and do not represent the stand of this publication.
Read all the Latest News, Breaking News and Coronavirus News here.
Comments
0 comment