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Home / Opinion / Views /  The recovery of India’s reputation on tax policy

Policy consistency is among the hallmarks of a democracy. It gives investors the confidence that business rules will not change without good reason. Two developments last week have helped salvage India’s reputation for policy stability among global investors. On Friday, our apex court ruled in favour of America’s Amazon Inc, upholding a Singapore arbitration interim order halting Reliance’s $3.4 billion acquisition of Future Group’s retail assets on account of the latter’s prior pact with the US company. On the same day, the Lok Sabha okayed a bill that amends the Income Tax Act and Finance Act, 2012, to scrap retrospective taxation of indirect transfers of Indian assets. Offshore deals on foreign holdings will still be taxable, but only if done after a 2012 tweak to that effect came into force on 28 May 2012, not before. As this will nullify demands raised on transactions done earlier, it marks a welcome U-turn on the government’s effort to squeeze the likes of UK-based Vodafone and Cairn Energy for taxes on deals done before they were made taxable. It’s unfortunate that it took a string of adverse rulings by arbitrators abroad, exposing our tax policy to global ridicule, for us to alter our stance. To settle those disputes, the Centre is now expected to refund levies already collected, provided off-the-hook assessees drop their legal charges and do not demand interest on the money owed.

As the ruling Bharatiya Janata Party had slammed the then Congress-led government’s 2012 shift as “tax terror", the Narendra Modi administration’s pursuit of those cases had been a surprise. Of the 17 retro tax demands, the most prominent case was that of Vodafone Plc, asked to cough up $2.7 billion in taxes, interest and penalty on capital gains made on a 2007 deal done overseas that saw it buy control for $11 billion of Hutch Essar, an Indian telecom business, from a Cayman Islands unit of Hong Kong’s Hutchison Whampoa. Even more complex was the case of Cairn, which in 2015 was slapped with a tax bill of about $4.3 billion traced to a 2006 transfer of Indian oil assets to a group entity as part of an asset consolidation exercise. To claim this sum, India seized and later sold off shares held by Cairn in a local unit that was in the process of being merged with Vedanta. This money, we must now repay. Our refusal to do so even after international awards of arbitration in Cairn’s favour made it press for compensation enforcement, and a recent French court directive nearly saw Indian assets grabbed by it in Paris. The shock of this made it clear how untenable our insistence on retro tax payments was. Vodafone, likewise, had also won its argument against our tax authorities. As India has signed foreign treaties that require us to abide by global arbitration, our rejection of those awards had left global observers aghast.

A lid can finally be placed on that saga now, but our principles of taxation must not get confused in all its twists and turns. We must not mix up our right to tax offshore deals involving local assets with the absurdity of such a rule’s retrospective application. Had we not closed the loophole we did in 2012, we may well have seen an overseas market emerge for Indian assets beyond the reach of our tax system. Our error was to think tax notices could be slapped on deals going back to 1962. This was akin to, say, the Queen of Wonderland penalizing someone for past violations of a rule only just made up. Business, though, can only operate in a world of rules that are rational and clear.

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