It is a welcome move to withdraw the draconian retroactive levy on indirect transfers
“A tax collector should collect taxes from a taxpayer, just as a bee expertly collects honey from a flower without disturbing its petals.” This famous quote by Chanakya from Kautilyas Arthashastra, an ancient Indian Sanskrit treatise on statecraft and economic policy, cannot be more topical than today. India’s bitter experiences with retrospective tax levies on indirect remittances over the past decade show how much we can learn from the wisdom of our ancient texts.
It is not uncommon for a legislator to make retroactive changes to tax law, especially when those changes are clarifying. However, amendments to India’s income tax law introduced in 2012 to impose taxes on indirect transfers to overcome the Supreme Court ruling in the Vodafone case have generated unprecedented criticism both domestically and internationally.
Much has been said about the sovereign right or legislative competence to levy such a retrospective levy. Such a debate seems out of place in this context. The mere fact that India had a sovereign right to enact retroactive taxation law does not ipso facto mean that such exercise of that right was appropriate or appropriate.
Even if there is no fairness or a clear conscience in the interpretation and implementation of tax statutes by courts, this cannot be completely ignored when shaping tax policy.
The ill-considered move exposed India to multiple international arbitrations on the grounds that such a levy violated the fair and equitable treatment promised in various bilateral investment protection treaties.
After the arbitration awards already made in favor of taxpayers like Vodafone and Cairns, the Indian government is undoubtedly staring at the obligation to repay huge sums along with interest and damages / litigation costs. Embarrassingly, some of the foreign courts have already sanctioned the attachment of India’s foreign assets in order to collect these fees.
Apart from the financial implications in the form of the aforementioned payouts, the entire episode had massively damaged the confidence of international investors. According to the Indian government, this has proven counterproductive for India’s attempt to position itself as an attractive investment destination and to increase business convenience.
In the face of these setbacks in international proceedings, the Indian government continued to defend its sovereign right to subsequent taxation and appealed against the arbitral awards. Such government opposition had further terrified the international investment community at a time when India is desperately seeking foreign investment to fuel domestic economic growth.
With this in mind, it is a courageous corrective action by India, particularly politically, to reverse the retrospective effects of the provisions introduced in 2012. In 2012, the government also proposed that past disputes be resolved by repaying the amounts already collected, but without interest.
The main prerequisite for the agreement is that the taxpayers withdraw all pending legal disputes / arbitration proceedings and waive further claims for damages and costs. It remains to be seen whether companies like Vodafone and Cairn will accept this offer, which will result in a significant reduction in the claims awarded.
In addition to the substantial interest it incurs, taxpayers have incurred significant legal costs over time in pursuing the matter in several international forums. Many taxpayers may still opt for a ceasefire and avoid further extension, especially considering their long-term business interests in India.
The question remains whether it is too little, too late. Although the current political dispensation condemned her predecessor for introducing the measure, it took a good seven years in power before she found the political will and courage to take it back. Over time, interest rates and other costs have risen, making it difficult for taxpayers to forego a significant portion of their dispute resolution claims.
Be that as it may, it is still arguably the Indian government’s strongest declaration of intent to honor its international commitments and regain investor confidence. This is a step by India in the right direction and sends a very positive signal to the international community. However, India has many more steps to take to create a stable, predictable and investor-friendly tax environment in India.
India must resist the temptation to use its legislative powers and make such retroactive tax collection a thing of the past. It should also avoid frequent sweeping changes in tax policy and provide companies with a stable tax system to invest, work and grow.
There have been many reforms in the area of tax assessment and administration in recent years. Steps also need to be taken to strengthen the alternative dispute settlement mechanisms, in particular the possibility of obtaining preliminary rulings. The government should also take a pragmatic approach to tax disputes and systems should be put in place to review unreasonable and unsustainable claims made by tax officials.
Welcome train
It is indeed a welcome move by the Indian government to withdraw the draconian retroactive levy on indirect transfers. It’s probably a case of better late than never. Given the psyche of the retroactive levy on the international investing community, India will have to take many such confidence building measures in the near future.
The current government has demonstrated its political will to make tough decisions in the country’s greater economic interest. Hopefully we will successfully bury the ghosts of the past and walk towards a new India that will become the world’s investment destination.
V Lakshmikumaran
Managing Partner, Lakshmikumaran & Sridharan
The material on this website is intended for financial institutions, professional investors and their professional advisers. It is for information only. Please read our terms and conditions and privacy policy before using the website. All materials are subject to strictly enforced copyright laws.
© 2021 Euromoney Institutional Investor PLC. You can find help in our FAQ.