Modi sounds more definitive, will lose face if not done
“We have clearly articulated that we will not resort to retrospective taxation and demonstrated this position in a number of ways”, prime minister Narendra Moditold a sceptical audience of investors in the UK last November. It is true, as Modi pointed out, that the removal of the minimum alternate tax (MAT) on FPIs was a sign of the government’s commitment to be investor-friendly, but this had nothing to do with retrospective tax—indeed, the tax was removed only after FPIs started pulling out of the country. As both Vodafone and Cairn—both headquartered in the UK—know, despite several similar sounding statements by Modi and finance minister Arun Jaitley, there has been no resolution to their tax cases even after two budgets being passed. In his address to the delegation of businessmen led by French president Francois Hollande over the weekend, Modi was a lot more definitive. “Retrospective tax is a matter of the past”, he said as his government has said again and again. But then, he added, “We are ensuring that neither this government nor future governments can open this chapter”. The only way that can happen is if the statute is struck off the books—after two years of inaction, will Modi finally bite the bullet?
Even if Modi does decide to take action to ensure investors don’t completely lose their faith in the government, what will be critical is how existing cases like Vodafone and Cairn are handled. So far, the government has not shown any ability to move out of the narrow confines of the law to come up with a solution—indeed, even after having finalised the arbitrator panel for both Vodafone and Cairn, the official line is that tax cases can’t be arbitrated. That is intriguing since, in the case of the FPIs, the government appointed the AP Shah committee which opined against the tax, and its suggestions were quickly accepted—there was, interestingly, no great opposition to this or charges that money had changed hands which is what the government fears if the retro tax is repealed. In the case of the retro tax, there have been similar reports by committees such as the Parathasarathi Shome one, but the government didn’t act upon them. A pro-active government would have either accepted Shome’s report or given the case to the Shah committee or at least pushed the arbitration process instead of delaying it as it has—and announced, in advance, that it would not challenge the arbitration award; investors have little faith in arbitration solutions since, in the case of both White Industries (pending since 2002) and Antrix-Devas (awarded last year), the award in favour of foreign firms has been held up in Indian courts. A good example of the way the taxman continues to remain rule-bound is that of travel portal MakeMyTrip where a senior official was arrested without even a show-cause being filed earlier this month. When an appalled Delhi High Court asked how this was possible—a position taken by this newspaper as well—the tax department repeated its point that the law allowed the taxman to make an arrest for not making service tax payments and filing a show-cause notice later; no one even stopped to think of how unfair the arrest was, just as no one in the government has paused to consider how a Cairn could ever be taxed for reorganising its business where not even one rupee exchanged hands.