‘Retrospective tax window’ no solution for Vodafone, Cairn

The need for stable tax policy is very well understood by the Finance Minister and Government...

The NDA government’s attempt to resolve one of the biggest legacy issues affecting India’s investment climate since the UPA Regime — retrospective tax demand on companies like Vodafone and Cairn — is likely to be a non-starter, U.K. India Business Council chairperson Patricia Hewitt said.

“Frankly, if you are being asked to pay a very large sum, which every legal advisor has told you is not due, then being told that the government will kindly waive the penalty and interest on the large sum doesn’t solve the problem,” Ms. Hewitt told The Hindu .

Finance Minister Arun Jaitley offered a one-time window in the Union Budget for such retrospective tax dues to be paid, promising to waive penalties and interest dues on the tax liabilities in return.

Over a dozen companies face retrospective tax demands for transactions they completed in the past, following a controversial retro-active tax provision introduced in 2012.

Both Vodafone and Cairn, who face huge tax demands in India for past corporate transactions, are headquartered in the U.K. Cairn faces a demand for Rs.10,247 crore in retrospective taxes and an equivalent sum as penal interest on an eight-year old corporate transaction.

The original tax demand on Vodafone was around Rs. 8,000 crore but with interest and penalties, it is estimated to have touched Rs. 20,000 crore. Both companies had said after the Budget that they will study the offer for dispute resolution.

Ms. Hewitt, a former trade and investment minister in the Tony Blair administration, stressed that a stable and predictable tax policy is not just critical for foreign investors but also Indian investors.

“I think everybody, including the Indian government, is frustrated that this legacy issue still casts a shadow over the Indian investment climate. It’s only part of the picture and we keep stressing the positives (but) we are as frustrated as anybody that it hasn’t simply been taken off the table,” she said.

The UKIBC chief, who is also a member of the newly set-up India U.K. CEO Forum, said that companies often seek a settlement on tax disputes but no board of directors in U.K. or India would allow the company’s value to be destroyed in the process.

“You have to remember, certainly, under British company law and I have no doubt, under Indian company law, directors have legal responsibility to safeguard the value and the integrity of their company and may settle a disputed tax if it’s a sensible thing to do. But what they can’t do is pay an unacceptably large amount that will destroy much of the value of the company, simply in return of interest and penalty being waived,” Ms. Hewitt pointed out.

“If the Budget statement does open the door to discussions about a settlement then I am sure there will be companies who will welcome it and hopefully, reach a settlement,” she said adding that the other sensible alternative would be to wait to go through the courts and arbitration to get the dispute resolved.

While the government’s commitment to maintaining fiscal deficit targets evokes confidence at a macro-economic level, it will need a sustainable tax base and higher revenues to keep up, the UKIBC chief pointed out.

“I think what does concern Indian as well as foreign business leaders is if you have tax officials targeted to bring in a certain amount of revenue, then they have the temptation to issue demands that will not survive an appeal to the tax tribunal or courts but will take years to sort out and of course, involve a great deal of expense and time for the companies involved,” she said.

She said such an approach will not fetch revenue and undermine the ability of businesses to invest.

“The need for a stable tax policy is very well understood by the finance minister and the government. As ever, implementation is the key,” Ms. Hewitt said.

Former Finance Minister P. Chidambaram had recently told The Hindu that if he had been part of a government with 282 seats in the Lok Sabha, he would have repealed the retrospective tax clause in the first Budget.

I think everybody, including the Indian government, is frustrated that this legacy issue still casts a shadow over the Indian investment climate.

This article first appeared in The Hindu