The Japanese government has asked the Narendra Modi government to cut a $3 billion retrospective tax bill on Japanese companies operating in India, claiming it was “unreasonable” and “discriminatory”. It has said the tax claims, made in FY ‘14, could impact future Japanese investments in India.

Tokyo is hoping for relief in the BJP-led governent’s first Budget that Finance Minister Arun Jaitley will present in Parliament in the first week of July.

The tax demands include a $2 billion bill on Mitsubishi and about $600 million on Honda. “Some of the Indian subsidiaries of the Japanese companies such as Honda and Mitsubishi Corporation are facing unreasonably huge tax demands,” notes a document prepared by the Japanese government and sent to the Indian finance and commerce ministries.

“These (tax demands) have created a lot of irritation and affected the interest of Japanese companies to invest in India,” Tamaki Tsukada, minister, economic section at the Japanese Embassy, told The Indian Express.

The concerns were raised by Japanese Prime Minister Shinzo Abe at the summit meeting with then Prime Minister Manmohan Singh earlier this year. But despite a joint statement on creating “predictability and transparency in terms of business environment including tax administration”, the issue was left unresolved, said Tsukada.

While the tax demand on Honda under Section 40(a) (i) of the Income Tax act is large, the claim on Mitsubishi at $2 billion (as much as the demand on Vodafone) has been contested by the Japanese government. Tsukada explained that the retrospective tax bill stretches over almost a decade of Mitsubishi’s operations.

The tax department has “disallowed payments for goods purchased by the Indian subsidiaries (like Mitsubishi India) from their parent companies, alleging that obligation of withholding tax was not complied with”. The problem, said Tsukada, was that when these companies set up shop in India, the tax provisions did not exist, and so it was unfair to apply them now.

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The Japanese government has further alleged that the tax demands violate the India-Japan Tax Treaty. It is now hoping the tax claims will be rescinded since its companies are in the manufacturing sector, which India wants to expand through bilateral cooperation with many of these companies from Japan.

The claims “amount to a discrimination prohibited under Article 24(3) of the India Japan Tax Treaty to disallow payments for goods purchased by the Indian subsidiaries from a non-resident,” says the Japanese government’s note. It adds that “such a situation has a significantly adverse impact on their business in India”. The tax issue will also be flagged in the India Japan Chamber of Commerce memorandum to

be submitted to Jaitley this month. The Japanese ambassador to India, Takeshi Yagi, who has sought an appointment with Jaitley, is also expected to raise the issue.
Indian tax rules are being repeatedly challenged by multi-national companies of late. Japan joins the list of countries that have substantial tax disputes with India.
Speaking at the Idea Exchange interaction at The Indian Express recently, Law Minister Ravi Shankar Prasad said he was against the application of retrospective tax laws except in rare cases, though the government should retain the power to use it.
A former revenue secretary said the rise in demands stem from the acute pressure on the tax departments to meet the budget targets for reduction of revenue deficit set by the government in the past few years. “Unless the deficit numbers are rationalised, it is difficult to see how these tax demands can be withdrawn,” he said.