India Inc lauded when the Supreme Court vindicated Vodafone's stance on capital gains tax and exempted the telecom firm from paying Rs 11,000 crore demanded by the Income Tax Department. Corporate captains hailed the decision saying it would create a more favourable investment climate in the country and attract a great deal of foreign investments.
The government, however, had other concerns. The Vodafone deal was the first among many such to have escaped the tax net. The tax department estimated it would lose about Rs 40,000 crore in revenues from other Vodafone-type deals following the apex court's decision.
Retro tax introduced
The government seemed to buy the tax department’s argument, and in any case was looking at ramping up revenues to meet its mounting expenses. So, when the Union Budget was announced on March 16, the then finance minister Pranab Mukherjee, proposed changes to India's tax rules.
Under the new rules, amendments were to take place retrospectively from 1st April, 1962. And what this meant was crystal clear. Many closed tax cases could theoretically be re-considered, including that of Vodafone’s.
It might have appeared as if the government had gone overboard to use its power to undo court rulings with retrospective amendments. But a whole lot of drama awaited the proposal.
Vodafone's chief executive Vittorio Colao was prompt in expressing his concern, and said that the retrospective taxation could tarnish India's image as an investment destination in a letter written to the Prime Minister Manmohan Singh.
The United Kingdom categorically conveyed to India that its proposed move would hurt the overall investment climate in the country.
“We are concerned about the proposed Budget measure...Not just because of its impact on one company, Vodafone, but because we think it might damage the overall climate for investment in India,” UK’s chancellor of the exchequer, George Osborne told reporters.
Business lobby groups in the US also expressed their concern to the PM, saying “The sudden and unprecedented move in the Bill has undermined confidence in the policies of the government of India toward foreign investment and taxation and has called into question the very rule of law.”
Corporate Affairs Minister Veerappa Moily had also asked the Prime Minister to reconsider the move as it would hurt the foreign investment.
However, Pranab Mukherjee held his ground and asserted that the amendments were 'clarificatory' in nature and would not override the provisions in double taxation avoidance agreements.
To Mukherjee, there was "no other way" but to amend the Income Tax Act with retrospective effect to bring into the net Vodafone-type cross-border deals.
And then, there was a twist in the tale. Pranab, the Finance Minister was elected as India's 13th President.
Within 48 hours after Pranab Mukherjee left North Block, the finance ministry got into action to resolve the controversial taxation issue. The PMO had asked the ministry for clarifications on the amendments.
PC takes over
And finally it was the new Finance Minister, P Chidambaram who stepped in and promised to fine-tune policies and measures and to put in place a stable and non-adversarial tax regime.
As reported in the Business Standard Chidambaram made it clear that the adjustments would be made on revenue as well as expenditure sides to rein in the fiscal deficit, estimated at 5.1% of GDP in the current financial year. He also asked the people to share the burden of fiscal correction.
Chidambaram has promised corrective measures to regain investor confidence, that had suffered a setback after the announcement of General Anti-Avoidance Rules (GAAR) and tax on the indirect transfer of Indian assets by foreign residents, with retrospective effect.
However, even the FinMin's views did not go unopposed. The CPI(M) has claimed that "Reversing this measure means helping Vodafone to avoid paying a tax claim of Rs 12,000 crore on acquisitions in India."
The CPI(M) Politburo had also opined that the measures announced are meant to help multinational companies' non-payment of tax on assets they acquire in India and will facilitate tax avoidance by foreign and Indian corporates.
The party had also demanded that the government implement the retrospective provision in the law and work out effective rules under GAAR.
If October 02 reports are to be believed then the final guidelines on GAAR is expected within 20 days. Besides, the government is also seeking public comments on the Shome panel views on the retrospective tax law amendments. The Finance Ministry had also clearly indicated that the government will take the final call on GAAR and retrospective amendments on the basis of the panel's report.
The latest we hear from the central government is that there is no reason not to address issues pertaining to the retrospective amendment of income-tax laws. And that there is no need to wait till the next year's budget session.
To quote Chidambaram “Once we take a view on the Shome Committee report, I see no reason why we should wait for the budget session. We should move whatever changes have to be brought about in Parliament as early as possible."
Meanwhile it is reported that the Shome panel has said that retrospective amendment of tax laws should occur in exceptional or rarest of rare cases and with particular objectives and apply to matters that are "genuinely clarificatory" in nature.
It also contradicted Finance Ministry's view on retrospective tax amendment saying that "provisions relating to taxation of indirect transfer as introduced by the Finance Act, 2012 are not clarificatory in nature and instead, would tend to widen the tax base."