concerns on retrospective tax changes
Livemint, May 01, 2012
Not known for taking hard
anti-government positions—no matter how
justified—India’s most powerful industry lobby,
the Confederation of Indian Industry (CII) has
closed ranks with foreign investors and objected
to, in a draft note, the government’s move to
effect retrospective tax amendments and its
failure to insert safeguards in the proposed
general anti-avoidance rules (GAAR).
Interestingly, the draft note, being circulated by representatives
of Vodafone, sees the lobby taking the side of the telco and
asking the government do away with one retrospective amendment
that could mean an outgo of around $4 billion (Rs.21,000 crore) in
taxes, interest and penalties for the UK-based company.
CII spokesperson did not deny the existence of the draft note, but
maintained that the lobby had not made any submission to the
Pradeep S. Mehta, secretary general of consumer advocacy group
CUTS, said that without going into the merits of the issue, he
thinks industry lobby groups should have an independent view on
such matters. “They should not be cowed down by the government’s
stand,” he said.
has also asked the government to introduce sufficient safeguards
in the GAAR provision because these could otherwise severely
impact foreign investment coming into the country. Under GAAR, any
arrangement made between entities to deliberately avoid tax can be
invalidated, and the tax department is empowered to probe any
transaction that it views as structured to avoid tax.
“Such amendments give rise to deep uncertainty and instability in
the tax system and significantly erode the investors’ confidence
in India as a stable tax jurisdiction, especially when India has
begun to develop the image of a stable market,” said the CII note,
which has been reviewed by Mint.
Vodafone and the Indian tax authorities have been at loggerheads
ever since Vodafone International Holdings BV bought 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 ($2
20 January verdict, the Supreme Court ruled in favour of the telco,
saying that the tax department did not have the jurisdiction to
tax the transaction. Following the judgement, the government
brought in a retrospective amendment to bring similar transactions
into the tax net. The government estimates it will get around
Rs.40,000 crore in taxes through these changes.
CII’s note has also argued that although other countries have gone
in for retrospective amendments, these never seek to overturn a
verdict of the country’s highest court. “Retrospective amendments
have been curative in nature to ensure consistent application of
law,” it said.
letter also cites McKinsey estimates that say that the cumulative
foreign direct investment between 2012-13 and 2015-16 was
projected to be $161 billion based on the trend of the last six
years, and that due to the uncertain environment, this is now
projected to be around $74 billion.
note also criticizes the lack of safeguards in the GAAR provisions
made in the Finance Bill, which are “likely to cause unnecessary
anxiety amongst investors, including private equity investors, due
to the uncertainty and unpredictability of what the Indian tax
authorities may do to invoke the provisions”.
has asked the government to take into account the recommendations
of the parliamentary standing committee of finance on the Direct
Taxes Code Bill before finalizing the GAAR provisions.
industry lobby has suggested substantial dilution in the GAAR
provisions. Its recommends that GAAR should only be invoked when
the sole purpose is tax evasion, the onus to establish proof
should lie with the tax department and not the taxpayer, and that
the GAAR panel should have two independent members. It has also
recommended that all existing structures and arrangements be
outside GAAR’s purview.
While the government is considering bringing one independent
member on the GAAR panel and defining a threshold, it is unlikely
to exempt income generated from existing structures with effect
from 1 April this year.
“Income accrued before this year will not come under GAAR. But
income generated from existing arrangements will come under
scrutiny. They are not going to be exempted,” a finance ministry
official said. “We are also considering the demand of foreign
institutional investors (FIIs) to put the onus on the tax
department to prove tax avoidance,” added this person, who did not
want to be identified.
The introduction of GAAR, which will make FIIs liable to pay
short-term capital gains tax in India, had invoked widespread
opposition from foreign investors.
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