The Retro Tax, Shakespeare, BJP Manifesto And Why Pranab Mukherjee Gets The Last Word
Few will remember that nine years ago, when Pranab Mukherjee presented the union budget for 2012-13 he made no mention of a retrospective tax on indirect transfers. That detail was buried in the Finance Bill fine print. The only hint the finance minister gave while presenting his budget was to quote from Hamlet when he started reading out the section on taxes.
“I must be cruel only to be kind.”
Mukherjee and the income tax department were not wrong to want to tax the sale of Indian telecom firm Hutchinson-Essar Ltd. to U.K.'s Vodafone Group and several other similar transactions. After all, these deals involved, solely or substantially, assets situated in India but purchased and sold via offshore companies.
The substance was in India's favour, form was not.
The income tax law made no explicit provision for the taxation of such offshore share transactions with underlying Indian assets. Which is why soon after his government lost in the Supreme Court, Mukherjee proposed a "clarificatory" amendment to the law, with retrospective effect from 1962, a year after the Income Tax Act was enacted. Which was to say, India always intended to tax such transactions in case it was not clear.
Well, it was not.
And the 2012 amendment muddied India's image further.
The Vodafone Tax or Retro Tax, as it came to be known, generated an economy of its own – thousands of crores in tax demands on past transactions, hundreds of lawyers to defend the deals and as many consultants to vet legacy FDI structures and tax implications. Dozens of television news debates were hosted (including by me), op-eds written and headlines coined – remember Taxtortion. For years this tax fed many a mouth and mind.
It also precipitated the decline of one government accused of "tax terrorism" among other graver sins, and the rise of another that promised to provide "a non adversarial and conducive tax environment" among other loftier things.
Yet, it's taken Prime Minister Modi seven years to turn back the clock.
To be clear, the proposed amendment bill — to nullify the Retro Tax and refund tax collected — is not a sudden pang of conscience for the Modi government.
As experts repeatedly remind – India reforms in a crisis.
In the past one year, India has lost two marquee international cases arising from this tax – filed by Vodafone and Cairn. Last month Cairn, in order to recover the tax and damages it was awarded, convinced a French court to freeze some Indian government assets in that country. This is a first for India. Cairn has also set its sights on Air India's assets, adding to the turbulence surrounding the national carrier's privatisation.
Though it has filed appeals, the Modi government is on weak legal ground and facing serious image damage from a problem not of its creation.
The amendment bill is a smart save face.
Yes, it denies any interest or penalty payments to those wronged by the Retro Tax, but it's the most any government could offer in these circumstances.
To agree to refund over Rs 12,000 crore in a pandemic year requires liquidity courage. If Finance Minister Nirmala Sitharaman didn't make history in February, she's certainly making it now.
Meanwhile, Mukherjee got his wish too, in a twisted sort of way. He closed his 2012 budget speech by saying - "Whether or not today’s announcements make tomorrow morning’s headlines matters little, as long as they help in shaping the headlines that describe India a decade from now."
It's been almost a decade.
Menaka Doshi is Managing Editor at BloombergQuint.