Retroactive tax repeal is laudable, but needs more reform to woo foreign investors

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By introducing changes to the Income Tax Act on Thursday, the government paved the way for the withdrawal of all retroactive tax claims. This is a laudable move, as the retrospective tax law of 2012 not only harmed India’s ability to attract foreign investment, but also damaged its reputation, with international courts allowing the seizure of Indian property in the United States. ‘foreigner.

This decision will bring relief to 17 companies against which tax claims amounting to Rs 1.10 lakh crore have been raised. The government also decided to return around Rs 8,100 crore it collected from companies, much of it, Rs 7,900 crore, to Cairn Energy.

The sordid saga of retrospective taxation, however, began with the famous Vodafone affair. Vodafone purchased Hutchison’s mobile phone business and other assets in India in 2007, on which the Indian government demanded Rs 7,990 crore in capital gains and withholding taxes from Vodafone. Vodafone legally challenged the notice of formal notice and won the case in the Supreme Court in 2012.

The case should have ended there, but the taxes succeeded in convincing the then finance minister, Pranab Mukherjee, to disregard the country’s highest court and overturn his ruling by issuing a order, which he did. The late statesman had many virtues, but international taxation was not one of them.

While the decision to do away with odious legislation is welcome, it appears to be the result of compulsion rather than choice. Apparently, this was done because the government feared its overseas assets could be seized by Cairn, who fought and won her case against India in international courts. However, Revenue Secretary Tarun Bajaj showed courage. He told a news channel that it was “unfair criticism to say that we did it under pressure because of the claim of Air India assets … It would have been a long battle, but we have decided in the best interest. [of all] and investors.

READ ALSO | Cairn tax dispute reveals major loopholes in India’s economic policy

More important than the motivation of the government is a question: why has it taken so long to abolish this irrational and insidious law? Mukherjee justified his action in his memoirs The years of the coalition (1996-2012): “What foreign investors need is certainty in tax laws, not a tax-free environment, which no emerging economy can afford. I was convinced that this certainty of paying taxes should be embedded in our tax policy.

The rationale would have made sense, but the fact that the Supreme Court struck down the government’s case in 2012 made the retrospective provision odious. If a government ignores its own Supreme Court, how could it hope to convince anyone to invest in the country?

Retrospective taxation has been widely opposed, including those in the context of dispensation from power. “[Prime minister] Manmohan Singh was convinced that the proposed amendment to the information technology law would have an impact on FDI flows in the country, ”Mukherjee wrote. In addition, “Sonia Gandhi, Kapil Sibal and P. Chidambaram also expressed concern that the retrospective changes create a negative sentiment for FDI. “

In short, the most important people in the ruling coalition at the time, the United Progressive Alliance, were against the proposal, yet Mukherjee was successful in pushing the amendment through. Worse, retrospective taxation continued even after the Bharatiya Janata party, which accused the UPA of “fiscal terrorism”, came to power in 2014. Such is the grip of irrationality on economic policy.

This hold is the result of the machinations of the dark pink state, that is, of politicians and decision-makers attached to the ideas of socialism and statism. Decades of socialism have transformed Leviathan into a Deep State. Contrary to the conventional sense, however, India’s deep state is impersonal; it is not about an ingrained group of people but about an institutionalized mindset that is inherently anti-business.

The anti-business attitude pervades the halls. Thus, it was unfortunate but not very surprising that the current regime accepted the logic offered by Mukherjee and supported by entrenched statists. The force of events seems to have overcome them.

Thus, the Minister of Finance Nirmala Sitharaman explained the rationale for the bill to repeal retrospective taxation: “In recent years, major reforms have been launched in the financial and infrastructure sector, which has created a positive environment for investment in the country. However, this retrospective clarifying amendment and the resulting demand created in a few cases continues to be a sore point for potential investors. “

She went on to add: “The country today finds itself at a time when a rapid recovery in the economy from the COVID-19 pandemic is the need of the moment and foreign investment has an important role to play in promoting faster economic growth and employment. “

While government efforts to address the sore spot are welcome, it would be naive and optimistic to assume that this decision alone will make India an attractive destination for investment. Because the statist attitude persists everywhere, and that creates problems.

Consider the contrast between personal protective equipment (PPE) and COVID vaccines. When the coronavirus crisis began, India was suffering from a severe shortage of PPE. Thanks to the enterprise of businessmen, the country exported PPE. According to an August 2020 government notification, “… the revised notification from the Director General of Foreign Trade (DGFT) in July 2020 authorized the export of PPE. As a result of this easing, in July itself India exported 23 lakh of PPE to five countries. These include the United States, United Kingdom, United Arab Emirates, Senegal and Slovenia. This happened because there were few restrictions on the production of PPE.

In the case of COVID vaccines, however, there is a price cap, which is the main cause of the vaccine shortage.

In short, the repeal of retrospective taxation should be complemented by other reform measures. Only this will convince investors to take India seriously.

The author is a freelance journalist. The opinions expressed in this article are those of the author and do not represent the position of this publication.

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