Last month, it was reported that the Japanese government requested the Modi government to cut a $3 billion retrospective tax bill on Japanese companies, specifically Mitsubishi and Honda, claiming it was “unreasonable” and “discriminatory”. The message sent forth was that the tax claims could impact future Japanese investments in India.
In a recent interview, Sonjoy Chatterjee, the India head of Goldman Sachs, identified the retrospective tax as the biggest concern among foreign investors.
Naturally, everyone was looking to see how finance minister Arun Jaitley would tackle that issue this Budget.
When sitting on the other side of the fence, Jaitley was vocal in his criticism of the retrospective tax. He believed it would hurt the investment climate of the country. The BJP’s pre-election Manifesto stated that the UPA Government unleashed 'tax terrorism' and 'uncertainty', which not only creates anxiety amongst the business class and negatively impacts the investment climate, but also dents the image of the country.
This time, when it was up to him to take a stand, he decided to tread cautiously.
He began by saying that the sovereign right of the government to undertake retrospective legislation is unquestionable. He immediately balanced it with “this power has to be exercised with extreme caution and judiciousness”.
Regarding the existing tax disputes, he said that they will be allowed to reach their logical conclusion. As far as fresh disputes are concerned, they will be looked into by a high level committee to be constituted by the CBDT before any action is initiated. The CBDT is the Central Board of Direct Taxes, a part of the Department of Revenue in the Ministry of Finance.
This was not the solution investors were looking for. They wanted it scrapped.
Here is a background.
In 2007, Hutchison exited India by selling its telecom business for $11.2 billion. Its cumulative investment in the country at that point in time was less than $2 billion. The deal was carried out by selling a company in the Cayman Islands, which controlled the Indian business through subsidiaries in Mauritius. As Hutchison had exited the country, the tax authorities pursued Vodafone, claiming it should have deducted or withheld tax at source.
A Supreme Court bench in 2012 noted that the deal was executed outside India. The judgment said that the tax authorities could not tax a deal outside the country under the law as it stood in 2007.
Along comes Budget 2012. The then Finance Minister Pranab Mukherjee introduced the retrospective clause, which stated that the intent of the relevant section of the law had always been — from the inception of the Income-Tax Act, 1961 — to tax deals carried out abroad in which the ownership of an Indian business changed hands.
Naturally this spooked global investors who were closely following Vodafone's long-running dispute. India's proposal to back-date tax claims on overseas deals involving local assets clouded business sentiment.
This time, what foreign investors were hoping for was a clean break, a clarification saying that it applied only from 2012 onwards.
No such luck!
Can't blame Jaitley. If the Modi government scrapped the amendment, the country's fiscal would have taken a huge hit.
