Sends out a very bad signal to investors on tax terror
It is not too often that corporates come out with strong statements against governments, so it was quite unusual to see Vodafone Plc say—after receiving a tax notice threatening to seize its assets if it did not pay R14,200 crore in taxes—“in a week when Prime Minister Modi is promoting a tax-friendly environment for foreign investors—this seems a complete disconnect between government and the tax department”. Worse, the revenue secretary tweeted that it was a “routine exercise of sending collection notice to all those whose dues are not stayed by any court” even though Vodafone Plc and the government are supposedly settling their case in an international arbitration court—what is the point of the arbitration if Vodafone has to keep jumping through hoops again to seek a stay on the order?
The action also makes a mockery of finance minister Arun Jaitley’s statement, in his first budget, that while he would not repeal the retrospective tax, he would allow the existing cases to be settled by various courts. Apart from the fact that there is no provision in the arbitration procedures that allows the taxman to attach assets while the process is still going on, the problem is that despite what Jaitley said, the government’s stance (at the arbitration court) remains that tax matters cannot be subject to arbitration. Also, given that an arbitration award needs to be enforced by Indian courts, if the government was serious about reassuring investors, it should have said that the award would be automatically enforced—the case of the Australian White Industries comes to mind immediately where, after the award against the public sector Coal India in 2002, the case remains in appeal in the Supreme Court; in the more recent arbitration award against ISRO’s arm Antrix, the latter has said it will file a case in the court on the matter, so that too is likely to be long-drawn.
Given prime minister Narendra Modi’s talk of fixing/removing the retrospective tax—most recently, to a delegation accompanying the French president last month—you would have thought the government would have taken special care in dealing with cases involving retrospective taxation, not leave it to routine exercises by taxmen under pressure to meet budgetary targets. Which is why, a few years ago, when tax relations between India and US had soured to the extent that the US side would not even talk to its Indian counterpart after a series of high-pitched transfer pricing demands, then finance minister P Chidambaram removed the head of the international tax division. Once a new chief was appointed, talks resumed, the number of high-pitched transfer pricing orders reduced and, after a period of around two years of discussions—during which a committee was also set up to recommend transfer pricing norms in various sectors—we are at a situation where, going by minister of state for finance’s tweets on Tuesday, 180 cases have been resolved under the Indo-US Mutual Agreement Procedure which involve a dispute of around R5,000 crore; indeed, discussions are also on for extending these to what are called ‘bilateral APAs’ so that the US taxman will give credit for taxes paid in India. It is odd to see intense cooperation with assessees in one wing of the tax department and such hostility in the other. How the finance ministry will resolve the issue is not clear, but until this tax terror—that the BJP campaigned against in the run-up to the elections—is resolved, it is unlikely investors are going to start trusting it.