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Fast-forward on retro tax
May, 09th 2016

Vodafone's decision last week to set the ball rolling on a $2.5-billion initial public offering was a smart decision as it reiterated the British telecom major's long-term commitment to the Indian market. The commitment was anyway never in doubt as the company continues to invest around Rs 8,500 crore every year in India for mobile network expansion and new technology deployment. During Prime Minister Narendra Modi's visit to the United Kingdom, Vodafone committed investments totalling Rs 13,000 crore for Digital India, Make in India and payments bank initiatives in India despite the Rs 14,200-crore retrospective tax dispute related to Vodafone's 2007 acquisition of Hutchison Essar. It is encouraging, therefore, that the government is reportedly holding negotiations with the company to settle the issue once and for all, even as arbitration proceedings are going on.

This comes as a pleasant surprise in the backdrop of some needless public posturing by both sides over the past few months after the Indian tax authorities served a fresh notice in February this year, creating an impression that the government is treating a sensitive issue as routine exercises by taxmen under pressure to meet budgetary targets. This is not about settling the dispute with one company or the specific merits of taxing the particular transaction. The larger point is that the retro tax issue has fuelled foreign investors' concerns over the government's failure to stop tax terrorism and improve the perception of India's business environment. This is borne out by the experience of Cairn Plc, which is locked in a similar case since January 2014 over a tax claim of Rs 10,247 crore. Both Vodafone and Cairn had got favourable verdicts from the Supreme Court, but the earlier government amended Section 9 of the Income-tax Act, 1961, in the 2012-13 Budget retrospectively so that it took effect from the date of commencement of the Act, nullifying the Supreme Court decision.

The Modi government did not roll back the section but had said in its first Budget that no fresh action would be taken; however, both companies got several tax notices demanding the tax with full penalties as these technically were not new cases. The lingering confusion only helped in negating the welcome assertions made by the government on different occasions in its bid to revive the confidence of investors that was shaken. Cairn, in fact, has claimed that it had to endure a $1-billion loss in value, forcing it to sell assets, postpone planned investments and cut workforce by 40 per cent. The point to be noted here is that no amount of claims on the ease of doing business or relaxation of foreign direct investment norms would be able to neutralise the government's dithering on the retrospective tax issue. Both transparency and predictability in the administration of the tax policy are needed.

In any case, the move to hold fresh negotiations on the dispute is in line with this year's Budget proposal of a one-time settlement scheme for all retrospective cases that involves scrapping of penalties and interest on payment of the principal liability. However, it is important that the negotiations are held in a transparent manner and the outcome is made public with full clarity. After all, even Vodafone might need this to justify to its shareholders the tax it may have to pay in a compromise settlement. Similarly, it would shield the government from charges of causing loss to the exchequer by waiving penalty and interest on the original tax demand.

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