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FM Shies Away From Retro Tax Issue

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It was expected to be one item that would definitely make it to the Union Budget ever since the Bharatiya Janata Party (BJP) spoke about tax terrorism in its Election Manifesto. But, finance minister Arun Jaitley decided to stay away from removing the retrospective taxation proposal brought in by the UPA government in 2012.

Instead, Jaitley talked about the sovereign right of government to undertake retrospective legislation being unquestionable. He stated that all fresh cases from the retrospective amendments of 2012 (in respect of indirect transfers and coming to the notice of the Assessing Officers) will be scrutinised by a High Level Committee to be constituted by the Central Board of Direct Taxes (CBDT) before any action is initiated in such cases.

However, that does not provide any relief for Newbury, UK-based Vodafone that is saddled with a tax bill of approximately Rs 20,000 crore. Reacting to the Budget, Vodafone issued a statement saying: “We note the finance minister’s announcement that existing cases arising from the 2012 retrospective tax law should follow the lawful process in which they are currently being adjudicated.  Vodafone will therefore continue the process of international arbitration initiated under the India-Netherlands Bilateral Investment Treaty.” It goes on to add that from the outset, Vodafone has maintained that there was no tax to pay – a view upheld by India’s Supreme Court – and the retrospective law in any case concerned tax on the gain made by Hutchison: Vodafone, as the buyer,  clearly made no capital gain whatsoever.

That does not do much to improve global investor sentiment in India. That is important for Jaitley who is looking to raise Rs 45,471 crore in this fiscal from the communications sector. That is more than the Rs 40,847 crore raised in the last fiscal. For Jaitley to achieve this target, he needs to have a successful auction of radio spectrum across the 800/900/1800/2100MHz bands. However, by still not resolving the retrospective tax issue could lower global investor sentiment. That is important since Indian telecom operators are already under high levels of debt post the last two auctions.

It is one thing to talk about a high level committee without exactly specifying the details. Says Rajiv Anand, Tax partner, Delotite India: “The FM has not removed the retrospective amendments made in 2012 to the Income Tax Act. What is not clear is what the high level committee be required to do, especially when the Act clearly requires indirect transfers to be subject to tax in India. It could just be that the committee would be given the mandate to scrutinise each transaction to ascertain if the arrangement had substance or was it entered into to avoid India capital gains tax liability.”

That means the government will have to come out with a clear stand over the next few days. Else, it is difficult for global investor sentiment to improve.

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