Though Vodafone would prefer not to pay the R19,500 crore tax demand considering the Supreme Court ruled in its favour, even the MNC realises that fighting the government is a mug’s game. More so since, with the government deciding to go after it through a retrospective amendment to the law which was passed by Parliament, it is difficult to see the law being struck down by the courts. After all, policy-making is the prerogative of the executive and the legislature. Which is why, for many months now, Vodafone has been engaged in a discussion with the taxman to reach a settlement on the amount of tax to be paid—the original demand, before penalties and interest payments were added on, was for R12,000 crore. In the event a settlement is reached, where Vodafone has to pay the initial demand but not the penalties, this leaves the telco free to concentrate on growing its business instead of just wasting CEO’s time on battling tax authorities.
While a Vodafone settlement may allow the company to grow, the problem isn’t restricted to Vodafone alone. Over the past year, transfer pricing adjustments on MNC operations in India largely have risen from R44,500 crore in FY12 to R70,000 crore in FY13. How are these to be dealt with? In the Vodafone case too, the previous law minister had taken the view that conciliation was not possible under the Indian law, a view shared by the Attorney General—their argument was that since the tax was being charged under the Finance Act, how could the taxman work on a conciliation? After the finance ministry clarified that any agreement reached would have to be subject to Parliament ratifying it, the AG and the law ministry said conciliation was acceptable. While this works for Vodafone, how is conciliation to be done in the other cases which include top MNCs like Microsoft, Ikea and even Suzuki Motor Corporation?
Theoretically, these companies can appeal the taxman’s demands in various fora and also to the Settlement Commission. There is also the possibility, available now, of getting advance pricing agreements (APAs) where the taxman agrees to certain principles of how items of revenue and expenditure are to be treated—India already has 150 APA applications. More APAs are a way out for the future and MNCs also have the option to go in for conciliation under various double tax agreements as Nokia has sought to do now. In the long run, however, there is no substitute for setting up a formal conciliation procedure as you have in other areas. The problem with the current system like the Settlement Commission is that these are all dominated by the taxman. Also, given the taxman’s propensity to appeal any decision that goes against him needs to be curbed—a Standing Committee report showed that 60% of direct tax appeals, that reach the High Court and Supreme Court, go against the taxman.