Why Jaitley's offering to MNCs in tax dispute defies logic

The compromise suggested to the companies on retrospective taxation exposes the government's doublespeak on the issue even as it abused the UPA regime of tax terrorism

Governments and bureaucrats are known to tie themselves in knots when it comes to policies and taxes. While there may be simpler options available to cure a historic ailment, the government agencies often find more ways to complicate it further. This time the government has outdid itself in the retrospective tax case.

Finance Minister Arun Jaitley would like us to believe that he is offering an olive branch to MNCs whose cases are pending under retrospective amendment. In his budget speech the minister said “In order to give an opportunity to the past cases which are on-going under the retrospective amendment, I propose a one-time scheme of dispute resolution for them. They can settle the case by paying only the tax arrears, in which case liability of the interest and penalty shall be waived.”

The minister also imposed a condition that the companies should withdraw all pending litigations in courts or tribunals or arbitration proceedings.

A similar proposal was also made for other tax dispute cases totalling Rs 5.5 lakh crore. The finance minister announced a new dispute resolution scheme for direct and indirect taxes wherein a taxpayer can settle the case pending before commissioner (appeals) by paying tax and interest while getting a waiver on the penalty (in disputes involving amounts up to Rs.10 lakh) and 25% of penalty (in disputes involving a penalty more than Rs.10 lakh).

Finance minister’s statement defies logic.

The only reason these cases are before the court is because the aggrieved party feels that they have been wrongly taxed. Since the courts and arbitration proceedings have taken its own sweet time, interest and penalties have piled up. What Jaitley’s so called compromise suggests is that even if the government has wrongly taxed these companies, they should pay the tax. The government is willing to forego interest and penalties. This will be setting a wrong precedent on tax claims.

Take the case of Vodafone. The case pertains to February 11, 2007 when it acquired the business of Hutchison in India. The company says that as an acquirer it has made no capital gains. Further, the prevalent law in India in 2007 did not allow such transactions to be taxed. This view was unanimously upheld by the Supreme Court.

But the UPA government under the then finance minister Pranab Mukherjee amended the Income Tax Act retrospectively bringing such transactions under the tax net. Vodafone, disgusted with the Indian system went to the international arbitration tribunal.

In the run-up to the 2014 national elections and after being elected, Arun Jaitley and his fellow ministers and party colleagues had argued and criticised the previous government’s retrospective tax. Now when the time was appropriate to correct the wrong doing, the minister came out with a proposal that is turning out to be an embarrassment not only to his government, but will also damage India's image among international investors looking for tax predictability.

Tax experts do not see the government getting anything out of its proposal. Shefali Goradia, partner BMR Advisors in an interview to a newspaper said that the offer is unlikely to cut ice with foreign companies as they are disputing the retrospective levy of tax itself. If the government recognises that retrospective tax is bad for investor sentiment, it should have gone the extra mile and waived tax as well for past cases, says Goradia.

Before the budget, experts had expected the government to come clean on the issue. Cyril Shroff, managing partner at Cyril Amarchand Mangaldas had said that they (government) will have to bite the bullet and solve this Vodafone issue because it is disproportionate in terms of the negative mileage.

Rather than biting the bullet, government seems to be chewing on it. The compromise suggested to the companies on retrospective taxation exposes the government’s doublespeak on the issue even as it abused the previous govt of tax terrorism.