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Will Narendra Modi's maiden budget put an end to retrospective taxation and boost foreign investor confidence?

Thursday, 10 July 2014 - 9:59am IST Updated: Thursday, 10 July 2014 - 8:54am IST | Place: Mumbai | Agency: DNA Webdesk

The recent case of Vodafone tax deals has brought retrospective taxation to the forefront. A law that was constituted under Manmohan Singh's tenure as the PM, this law has created furore among foreign investors and Narendra Modi's development agenda may start with repealing this law. 

This could signal the start of a new era with the Modi government trying to create a investor-friendly business climate. Finance Minister Arun Jaitley is likely to announce on Thursday in his maiden budget the scrapping of a recent legislation that allowed India to tax deals that have already been concluded.

Besides this, even Commerce and Industry minister had termed the whole retrospective taxation as 'tax terrorism' and claimed that the Modi refime would address the issue to build investor confidence. So, if Arun Jaitley manages to propose scrapping this law, major foreign investors may start eyeing India again as a viable option with positive returns. 

If Modi government stands firm on what they say on the retrospective tax amendment, it is likely that the country's fiscal will have to take a hit of at least Rs 30,000 crore. Overall, India does not have a proper taxation policy for foreign investors and hence this loophole is utilised by companies who use tax havens and invest in diverse ways to evade tax. Hence, even if flawed retrospective taxation policy is scrapped, India needs a better taxation policy in place which can help the country in better tax collection and prevent companies from tax evasion. 

Bharatiya Janata Party (BJP) has come heavily on the United Progressive Alliance's (UPA) retrospective tax amendment regime.

Needless to mention, it will be a huge relief to companies such as UK-based telecom giant Vodafone who are caught in multi-billion taxation deal with the Indian government.

A majot amendment to the law was done after Supreme Court ruled in favour of British mobile operator Vodafone which challenged a $2.2 billion tax bill for  its 2007 acquisition of Indian mobile assets from Hutchison Whampoa. The purchase made Vodafone India's largest overseas corporate investor. This was done under Prime Minister Manmohan Singh. 

In 2012, the Supreme Court ruled that Vodafone was not liable for payment of any tax on the acquisition. The government later that year changed the rules to enable it to tax deals that had already been concluded. Post this, Vodafone has sought international arbitration after its talks with the Indian government failed to find a solution last year.

International investors who fled over reform policy inaction by Singh's coalition government and huge corruption scandals have been flooding back on hopes of change since the BJP's stunning victory in May's Lok Sabha elections where Congress was defeated. 

The $2.2 billion standoff between Vodafone and government has spelled troubles for the Indian economy as foreign investors have been staying away from India. 

Another firm, the Indian unit of Europe's largest oil producer Royal Dutch Shell Plc, Shell India Markets has also been caught under similar tax issues. According to reports, the Income Tax department has issued Shell with a transfer pricing adjustment of $3 billion and a tax demand of $1 billion.

All these issues come under the prerogative of the retrospective tax amendment that happened in 2012. Other companies who are also involved in different tax disputes with the Indian government are Finnish handset manufacturer Nokia, IT firm IBM and multi-national corporation WNS Holdings.

Changes in retro tax amendments unlikely in Budget- dna Archives

The new government in the forthcoming Budget is unlikely to take a view on the retrospective amendment to Income Tax laws as it is keen to weigh pros and cons before taking any decision on this matter.

"Time is too short for undoing the amendments made to IT Act in this Budget. It would require widespread consultation with stakeholders. All pros and cons have to be analysed," official sources said.

The last government could not take a view on reversing the retrospective tax amendment Act, sources said.

A decision needs to be taken on going ahead with changing amendments before pending litigations, including that involving Vodafone, are resolved, sources said adding that the pending litigations would have huge implication on revenue.

Amendment to Income Tax Act with retrospective effect made by the UPA government in 2012 to protect revenue had evoked sharp reactions from domestic as well as global investors.
Following the amendment to the Tax laws, the authorities issued a letter to Vodafone International Holdings BV stating that the company was required to pay tax demand of about Rs 11,217 crore along with interest.

Besides, an Income-Tax Department's order in January this year held that Edinburgh-based Cairn Plc made capital gains of Rs 24,503.50 crore when it transferred its entire India business from subsidiaries incorporated in Jersey, a tax haven, to the newly incorporated Cairn India in 2006.

Retrospective tax law damaged India's reputation most: European Union

Expressing confidence that the new government will spur the growth and investment in the country, European Union said nothing damaged India's reputation more than the retrospective tax legislation (now deferred for two years).

"Nothing has been damaging India's reputation as much as the retrospective tax law. I believe in the near future a new government will deal with this problem," European Union envoy Joao Cravinho said at an event here.

Stating that while it is not yet clear which political formation will occupy the South Block, the envoy said he is confident that the new government will take measures to revive the economy.

"We don't have the crystal ball, we don't know what the new government will look like, but one thing I can tell you for sure is that whatever the government looks like it will say very early on that it wants to promote growth, employment and foreign direct investments....It wants the country to return to the level of growth it has achieved recently or in the past years," he said.

The measures that the new government can take will change the mood and the atmosphere and signal to Europe and around the world that India is interested in business and attracting the business, he said.

"There are a few other low-hanging fruits that a new government can pluck to change the mood and give a clear signal that it would like to attract investments. And if it does that I believe the investments will be forthcoming quite easily," he said.

He said the EU thinks that there are very good possibilities for the European companies to increase their investments here.

Cravinho also said India will be an important partner for the European Union even as it expects better economic future for the home economies.

India should look at retrospective tax issue with open mind: USIBC 

Amidst foreign investors raising voices against retrospective tax legislation, the US-India Business Council today expressed hope that India would look at the matter "with an open mind". 

"I am just reading the newspapers and a lot of them are talking about improving the ease of doing business in India. I think that is the right kind of tonality...I am certain that they (India) are approaching with an open mind," US-India Business Council (USIBC) Chairman Ajay Banga said. He was replying to a question related to concerns being raised by investors on retrospective taxation. 

Amendment to the Income Tax Act with retrospective effect made by the UPA government in 2012 to protect revenue had evoked sharp reactions from domestic as well as global investors. 

Banga said that the government in India is new and one should give more time to them to fix their priorities. 

With PTI inputs

 

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