A rollback to roll in funds
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It took two reports of over 191 pages to undo 18 clauses written in or amended by Budget 2012-13 that had spooked investment and created a global furore over Indian tax laws.
The furore swept in US Treasury Secretary Timothy Geithner, UK Prime Minister David Cameron along with a range of international investors who could not figure out why the then finance minister had rushed in with these amendments. The Parthasarathi Shome report has now made some fundamental principles clear in the Indian tax arena — retrospective taxation should be applied in only the rarest of rare cases. Also, fundamental changes should not be carried out without extensive consultations with taxpayers. The rationale is simple. A stable tax regime is possibly the best magnet to draw in foreign and local investments.
Shome has knocked off the contention of Pranab Mukherjee's Budget team that the retrospective amendments of the critical Section 9 of the Income Tax Act which they claimed were only clarificatory and not substantive, was incorrect. The changes were meant to tax Vodafone for their 2007 deal with Hutch and on which the company had won a long battle in the Supreme Court.
The suggestions now provide the much-needed leeway to the government to restore the lost investment momentum. However if it decides to implement the legislation prospectively, the finance ministry will have to forego around Rs 40,000 crore of possible revenue from a range of cases that fell under the ambit of the amendments. This will widen the fiscal deficit further. And should it decide to hold the straw offered by Shome — tax the seller instead, how does it recover tax from Hutchison, which is not even an assessee in India?
Finance minister P Chidambaram is likely to introduce the changes before the next Budget in the winter session itself. But the fiscal challenges mean the government is caught between a rock and a hard place.