Imagine you have just won a hard-fought match. You’re in high spirits, celebrating the victory and just then the umpire walks into your dressing room and tells you that the result has been changed and you lost the match because the victory target was revised after the game was played. Can you ever imagine anything as absurd and unfair as that? If it sounds impossible, perish the thought my friend. That is precisely what the Government of India is proposing to do with the tax laws.
Although it has been officially denied so far, there’s little doubt that the proposal has come in the wake of the Supreme Court decision in the Vodafone case. In layman’s terms, the takeover of Hutch by Vodafone involved the sale of shares in Vodafone India Limited (which was known then as Hutchinson Essar Limited) by one foreign company to another, which took place abroad. The tax on the profit arising from the sale is subject to tax, as it is in nearly every other country. It naturally follows that the party liable to pay tax on the transaction was the one which sold the shares. Since that company does not have a presence in India, the Income Tax Department served notice upon Vodafone India Limited.
The tax authorities proposed to treat Vodafone India as the party liable to pay taxes in India, contending that they could be treated as representatives of the seller on the basis of a “business connection.” That connection being restricted to a single transaction, the claim was always going to be a tenuous one. Not surprisingly, it was dismissed by the Supreme Court. That, in an ideal world, should have been the end of the story. Sadly, we live in a less than ideal world.
Make no mistake, the transaction of transferring the shares of Hutch to Vodafone was designed with the specific intention of exploiting loopholes in the tax laws, a pretty normal practice in international mergers and acquisitions. The Government recently proposed a new amendment to the tax laws to plug the loophole, which is perfectly understandable and acceptable. What’s much less acceptable is the fact that the change is to become effective retrospectively. Having being thwarted in its plans by the judiciary, it appears that the Government is keen to recover its pound of flesh through backhanded methods.
The practice of changing tax laws with retrospective effect is surely one of the most blatant abuses of legislative power. It is every bit as ridiculous and unfair as changing the rules of the game after it is played out. Morals apart, it could also set an extremely dangerous precedent. Why would any businessman invest his money in India, knowing fully well that the law could suddenly be changed retrospectively to penalize him for an act that was perfectly legal when it was done?
The recent cancellation of telecom licenses (admittedly due to a judicial decision) has already queered the pitch for investments. The on-going paralysis of decision-making has already caused a dramatic slowdown in fresh investments/expansions. It is hard to see any significant projects coming up in the near future, which hardly bodes well for the Indian economy. Economic growth needs investment and unfriendly Government policy is the biggest deterrent for investors- both domestic and international.
One only hopes that our policy makers realize the long term implications of their proposals. Make no mistake, India is in need of policy reforms if the growth momentum is to be sustained. If not, we could become a country with a massive economy but one that will remain a developing nation for several decades without becoming a truly developed one. Other nations have already trod upon this path- Brazil notably. It is imperative for India to shake off its complacence and get its act together, lest we too go down the same path.