New tax plan won’t hurt investment, says govt

New tax plan won’t hurt investment, says govt

New Delhi: Allaying fears of the industry, finance secretary R.S. Gujral on Sunday said budget tax proposals are not meant to cause undue harassment to companies and will not impact overseas investment into the country.

But in an indication that the government plans to stick to its stand, Gujral defended its decision to introduce a clarification to the Income Tax Act, 1961 that will allow it to retrospectively tax cross-border transactions involving underlying assets in India, such as the $11.08 billion (around 55,735 crore today) Vodafone-Hutchison deal.

In a meeting with industry lobbies, Gujral said the clarification was only to explain the original intent of the law.

“We have only sought to make the intention of the legislature clear that these transactions are subject to taxation," he said.

“It is an issue of interpretation. The judiciary had taken a view and interpreted the provisions in a certain way. But this was the intention of the legislation earlier and it’s the intention even now. Such transactions are not cases of double taxation. This is a case of no taxation anywhere in the world. Is this desirable?"

The Supreme Court had in January ruled the Vodafone-Hutchison deal was not taxable under Indian law and rejected the tax department’s claim of jurisdiction over a share transfer done overseas.

Industry bodies were unanimous in their opposition and said the move will affect foreign direct investment into the country.

“Regardless of however compelling the reasons, retrospective amendments in laws which have stood the test of legality do little for confidence-building and are a dampener for investors, both foreign and local," said R.V. Kanoria, president, Federation of Indian Chambers of Commerce and Industry.

B. Muthuraman, president, Confederation of Indian Industry, echoed similar views. “Making changes, seemingly substantive and retrospective in tax laws, will make the investors question our governance and our legal systems," Muthuraman said. “This might create an impression of India being an investor-unfriendly country, especially at a time when we need urgent investment."

Gujral insisted the government’s decision will not affect FDI into the country. “FDI comes when there are profits to be made. FDI doesn't come only on account of zero tax," he said.

“When a decision is taken on the investment, then the investor looks at the least tax option. China imposed a tax of 15% on such transactions. But their FDI has increased."

He also sought to assure the industry that the tax department will not rake up old cases.

“There is a doubt that the department will re-examine all cases. That is absolutely not true. There are several cases on the same point that are at different stages of assessment or appeals, to which this will apply," he said.

“It is not that any cold case will be raked up. The normal rule of reopening of assessment up to six years will apply," he said.

Gujral said such cases in different stages of assessment or appeals could lead to a potential revenue of 35,000-40,000 crore for the exchequer.

While industry groups welcomed the introduction of advanced pricing agreements, they expressed concern over the introduction of general anti-avoidance rule (GAAR) and its potential repercussions.

GAAR is a provision under which any arrangement made between entities to deliberately avoid tax can be invalidated.

The government will have in place sufficient safeguards to ensure tax officials do not misuse the GAAR provisions, Gujral said.

“We are going to have rules that are going to provide a threshold of tax benefits, above which GAAR can be invoked, and the circumstances in which GAAR may be invoked," said Gujral.

“Under GAAR, the onus is on the department to prove lack of commercial substance or misuse or abuse. Second, it can’t be done without the approval of commissioner, income tax. Third, CIT has to in turn take prior approval of a GAAR panel, which will consist of three officers of CIT level and above."