Srikar Venkatesan
Introduction
Finance Ministry, while presenting the much disillusioned and indifferent Union Budget with heavy fanfare and subsequent silence, brought out an amendment that took many people by surprise. It was not just a normal amendment. Rather, it was the Amendment with retrospective effect, of taxing transactions which resembled the ‘Vodafone-Hutchison Essar’ deal.
Why the retrospective amendment is good
The SC has rejected the Review Petition filed by the IT Department saying that the transaction between Vodafone and Hutchison Essar was a bonafide transaction and thus, does not come within the purview of taxation in India. Well, it was a bonafide transaction using a ‘Tax Planning vehicle’ that made the IT Department uncomfortable in the first place. The transfer was done by creating a Company offshore at Cayman Islands, the much acclaimed Tax Haven. If the intention was to be bonafide, and pay taxes, they would have well done the transfer from domicile country or atleast the host country, read India.
They didn’t, which shows their intention to avoid paying taxes for the transfer of assets. They did gain from the sale, probably one of the biggest in Indian times. Essar gained about 3 times the amount put in as investment when it entered business.
Granted, such transactions should be taxed. If FDI is to be encouraged, there are better ways to justify it. What say, shall we make all their income tax-free? Encourage FDI? Obviously not, right. So, the question now is, can such transactions be brought into the Taxation ambit with a amendment with retrospective effect*? Someone who has been rubbing salt on wounds by not seeing success all the way till the Supreme Court and winning it finally, this feels like Indian Cricket won it till the end and lost it in the Finals. Nonchalant. ‘Bring in the retrospective amendment!’ declared the Government.
Effects expected – Whether it will happen
One of the expected situations was that investments in the form of FDI will be discouraged with such retrospective amendment. The Government objected to this saying that such transactions entailing transfer of assets which are lying in India will have to be taxed in India and that such rules prevail in other countries. Granted, the Government is correct in this aspect. Also, no investment will reduce if the tax is imposed. But if we were to bring in the rule with retrospective effect, there lies a problem.
Assume a company feels that ‘India is just the right place to invest, for the future lays there, not in Autocratic China’, it presumes and asks for investment advice to a local consultant here, who says, ‘Do this and that, and there is a loophole here that is not plugged yet. You stand a definite chance to gain.” Happy investor does it all like the consultant claims, the grinning consultant gets paid and is happy.
Two years later, the IT Department knocks on his US doors for he has done a transaction that would cause him to pay taxes, huge ones at that. Investor goes to the Consultant, who suggests a renowned lawyer who handles such cases beautifully. The case goes on till the Supreme court, takes three years and over to reach there, and finally the verdict is handed over to the Investor. The law firm goes to the investor and says, ‘No Taxes.’ Wow, or so thinks the investor, when a retrospective amendment in law makes the transaction taxable. Now, this guy breaks down, well almost.
The consultant earned, the lawyer earned, now the IT Department stands to earn. Good for India, bad for the investor, and subsequently, bad for India. Now, the investor logs into twitter to damage the country for being a Tax Hell. Maybe, an amendment prospectively would have been a good choice to avoid India being a tax hell, let alone being amidst tax havens.
Ok, this calls for a conclusion to patient readers of the article. If rules are made once, amendments should be made only with prospective effect, how so ever it causes losses to the country. Remember the roadside kid who was captain of the opponent cricket team, who changed rules to his benefit when things seemed to be going awry for him, by adding ten runs to his score? Well, India is very much on it’s way there. India may say it is highly organized democracy when even the country’s autos cannot run on an organized fare system. Auto-crazy Demo-crazy.
*Retrospective Effect is a case when you enter a hotel, order a dish, taste it, find it is stale. Nevertheless, you eat most of it. With just one bite left, you ask the waiter to take it away angrily and give you a fresh one instead. ‘Or I will speak to the manager. Where is the manager?’
“Mr Srikar i appreciate the good piece of work … completely agree with the views. Though it involves huge money and fin.min coming out with retrospective effect still shows UPA’s appetite for money after swallowing millions of tax payers money in 2G,CWG, Nxt in line will be 4G. Attitude of Govt. Is questionable in this regard
This retrospective effect now has made Tax planning seem like Tax evasion . No point in tax planning if govt makes such amendments. At a time when many countries are making their portfolio welcoming in terms of FDI, we are taking many steps backward! This will only reduce our Foreign currency inflow. We are now a country with immense potential for growth and still slowly stangating.
Commenting on Mr. Sriram Ganesan -Mr.Srikar’s views may be from wider perspective which looks beyond revenue to Govt. It looks more on future prospects than current revenue. I bet UPA would not have made a even single tax payer happy with the way they run the govt. No wonder, it may be possible as Mr Grish Ahuja said, “NOTWITHSTANDING ANY THING SAID BY ANY COURT, by whatever Name it is called, FOR THAT MATTER, NONE OF THE JUDGEMENTS, which are against the revenue, WILL BE BINDING ON THE INCOME TAX DEPARTMENT OR ON THE MINISTRY OF FINANCE OR ON THE CBDT”. aslong as his corrupt govt. & a great knowledgeable used-less/Powerless PM in power.
This again shows really, how supreme the Supreme Court’s judgement is by making amendments against its Judgement. As the writer correctly said changing the rules of the game retrospectively after your opponent won. Funny though !
Ofcourse i see a huge loss to the Govt. if this has not happened. i strongly feel UPA doesnt deserve the money to be in their pockets.
@ Sriram ganesan – Other topics are also being highlighted everywhere. I don’t remember another article on this website on this Subject. Anyway, thank you for the ‘constructive’ comment. Yes, things like this will happen. But will it impact future growth, is the question. The retrospective amendment is just a means to the end. Not the end itself.
Somehow I wonder why this retrospective amendment alone is spoken this much. Is it something new which we have Not seen or Not experienced it before. Come on.
Class Room discussions in our Capital Gains can give you good memories.
Ofcourse In case any Ruling of the court which is going to cause Revenue Leakage to the Government, then the Law will be amended may be prospectively or Retrsopectively. Moreover We very well know that this will happen. But may be they will execute it only for Vodafone and they wont even look back after that.
Recollect some of the provisions / amendment has been brought only to facilate / attack a Particular company in specific. Section 72A – the Last clause was added only to facilitate Air India and Indian Airlines deal.
Come on Guys. Be practical . I get remembered of Mr Girish Ahuja Saying in a Meeting , ” if this is going to be the case, why can’t the income tax act have a section which says “NOTWITHSTANDING ANY THING SAID BY ANY COURT, by whatever Name it is called, FOR THAT MATTER, NONE OF THE JUDGEMENTS, which are against the revenue, WILL BE BINDING ON THE INCOME TAX DEPARTMENT OR ON THE MINISTRY OF FINANCE OR ON THE CBDT”.
There are lot more things apart from this in the Budget, Guys, Lets move on
@alpa christie : Well said. That is pretty much what I wanted to say.
@prasanna Ganapathy, CA GM – Thank you!
a better alternative is to make sturdy laws in the first place.
if you fail to make them so and someone takes advantage of them, then accept it gracefully and make prospective changes
you have to take a call whether you want to have a business friendly environment or sulking babudoms?
ensuring proper law enforcement is of more importance and relevance then digging out treasures which you missed out.
it is a normal attitude of any govt. servant to crush the person who voluntarily approaches but be oblivious to the massives who are obvious but initiatives need to be taken suo moto
I fully agree with ur views.
It should be Prospectively…
Good One…
Nice one!!! as author pointed out retrospective amendments can be a disaster to India as it would discourage the flow of foreign investments into India.
es it is a known fact. Also known is the fact that the law had Sec. 47(vi) to tax transactions involving and I quote from the Act – “47(via) Any transfer, in a scheme of amalgamation, of a capital asset being a share or shares held in an Indian company, by the amalgamating foreign company to the amalgamated foreign company, if – (a) At least twenty-five per cent of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company.
This says only an Indian Company. Which was the intention of the law, to encourage FDI. But however, it is now changing stance. When an investment vehicle is used in excess, it should be curbed. But to change the SC’s judgement using a retrospective amendment, and thereby pulling out dead skeletons is not the call of the day.
Yes it is a known fact. Also known is the fact that the law had Sec. 47(vi) to tax transactions involving and I quote from the Act – “(vi) Any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company to the amalgamated company if the amalgamated company is an Indian company”.
This says only an Indian Company. Which was the intention of the law, to encourage FDI. But however, it is now changing stance. When an investment vehicle is used in excess, it should be curbed. But to change the SC’s judgement using a retrospective amendment, and thereby pulling out dead skeletons is not the call of the day.
The writer is stating what we all know already. Is it that the writer is attempting to endorse the views of those against the retro amendment? Retro amendments, though frowned upon, neverthless can be a tool of defence against any large claim on the government that affects society. This has been done in several countries.