After a record 42 years, Liverpool last week suffered its first home-ground defeat against Fulham in the English Premier League. The loss was on account of a self-goal by Martin Škrtel. Watching the tragedy play out, one couldn’t help being beset by a feeling of déjà vu.
Back home in India, this scenario has played out ad nauseam during the second term of the Congress-led United Progressive Alliance (UPA). From an almost invincible position in 2009, the UPA, ahead of its third anniversary on 22 May, is now reduced to a status of daily wages.
However, unlike Liverpool, it has yet a chance for redemption when Parliament takes up the Finance Bill for debate and vote later this week. While it would definitely bring to an end the annual ritual of the Union budget, it has also, especially this year, provided the government and the finance minister—who if the media is to be believed, is in line to be anointed the next president of India—an opportunity to set the record straight and prove all critics wrong.
The budget has been widely condemned for a host of reasons, but the worst has been reserved for some of the provisions—retrospective tax amendments and its failure to insert safeguards in the proposed general anti-avoidance rules (GAAR)—proposed in the Finance Bill. Even the government’s evergreen cheerleaders, industry lobby groups, have broken ranks and lobbied the government against the proposals. Clearly, something has to give.
For those who came in late, at the core are the provisions that were inserted in the existing income-tax Act after the government lost its legal battle with Vodafone over tax dues. The battle ensued after Vodafone International Holdings BV purchased the Indian business operations of Hutchison Telecommunications International Ltd (HTIL) through the sale of a Cayman Islands-based firm called CGP Investments (Holdings) Ltd, a unit of HTIL, also incorporated in the Cayman Islands, a tax haven. The tax department estimated the phone company’s tax liability at more than Rs 11,000 crore (around $2 billion), which was legally challenged by Vodafone. On 20 January, the Supreme Court ruled in favour of Vodafone, arguing that the tax department did not have the jurisdiction to tax the transaction.
The government, however, brought in a retrospective amendment in the Finance Bill that would not only make the transaction by Vodafone taxable but also do so for other multinationals too in similar instances. (The government provides an implicit justification by claiming that this will net it an extra Rs 40,000 crore in taxes.)
Keeping with the same logic, the finance minister also introduced GAAR. While no one can dispute the spirit behind GAAR, some of the provisions once again potentially restore discretionary powers with the tax authorities. Those who have a long memory will recall how this was often misused by previous governments and its functionaries to often harass business and individuals, including political rivals.
A fear captured so succinctly by Ashok Desai, consulting editor of Businessworld magazine, in his latest column: “Arbitrary powers in the hands of unscrupulous bureaucrats make it profitable for business to become subservient and pliant. It spells the death of upright, straightforward business. That was the situation we had before 1991; now the government of the great economist who led the reforms is returning to the obnoxious habits of pre-reform governments. They used licence permit raj to subjugate industry; this government will use oppressive tax rules to do so.”
It is not about taxing Vodafone as the rhetoric of the debate would like us to believe. Instead, it is a fundamental principle of doing business. You can’t, even though it is within the powers of the executive, change the rules retrospectively well after a transaction has been conducted; regardless of whether it was done to exploit a legal loophole.
It is this singularly bad message that has gone out to the world and has left otherwise bullish foreign investors jittery. This could well be the proverbial final straw on the camel’s back. Progressive self-inflicted wounds have forced a policy paralysis, diminishing India’s growth prospects and consequently making it less attractive to investment. Now, the signal that a rules-based regime is also under threat only weakens India’s case even further; especially because some previous decisions of the UPA have smacked of the return to a 1970s mindset of command and control.
But all is not lost as yet. The UPA has an opportunity in the debate over the Finance Bill. Politically, it may mean a loss of face to the government and the finance minister, but a correction in the missteps would send out a very positive signal—the gains from which far outweigh the negatives. The world will be convinced that India respects a rules-based regime and is unafraid to admit and correct policy errors.
But the big question is whether the UPA has the moral and political courage to seize the moment and rewrite its legacy.
Anil Padmanabhan is deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at firstname.lastname@example.org
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