Finance Ministry, while presenting the much disillusioned and indifferent Union Budget with heavy fanfare and subsequent silence, brought out an amendment that took many people by surprise. It was not just a normal amendment. Rather, it was the Amendment with retrospective effect, of taxing transactions which resembled the 'Vodafone-Hutchison Essar' deal.
Why the retrospective amendment is good
The SC has rejected the Review Petition filed by the IT Department saying that the transaction between Vodafone and Hutchison Essar was a bonafide transaction and thus, does not come within the purview of taxation in India. Well, it was a bonafide transaction using a ‘Tax Planning vehicle’ that made the IT Department uncomfortable in the first place. The transfer was done by creating a Company offshore at Cayman Islands, the much acclaimed Tax Haven. If the intention was to be bonafide, and pay taxes, they would have well done the transfer from domicile country or atleast the host country, read India.
They didn't, which shows their intention to avoid paying taxes for the transfer of assets. They did gain from the sale, probably one of the biggest in Indian times. Essar gained about 3 times the amount put in as investment when it entered business.
Granted, such transactions should be taxed. If FDI is to be encouraged, there are better ways to justify it. What say, shall we make all their income tax-free? Encourage FDI? Obviously not, right. So, the question now is, can such transactions be brought into the Taxation ambit with a amendment with retrospective effect*? Someone who has been rubbing salt on wounds by not seeing success all the way till the Supreme Court and winning it finally, this feels like Indian Cricket won it till the end and lost it in the Finals. Nonchalant. 'Bring in the retrospective amendment!' declared the Government.
Effects expected - Whether it will happen
One of the expected situations was that investments in the form of FDI will be discouraged with such retrospective amendment. The Government objected to this saying that such transactions entailing transfer of assets which are lying in India will have to be taxed in India and that such rules prevail in other countries. Granted, the Government is correct in this aspect. Also, no investment will reduce if the tax is imposed. But if we were to bring in the rule with retrospective effect, there lies a problem.
Assume a company feels that 'India is just the right place to invest, for the future lays there, not in Autocratic China', it presumes and asks for investment advice to a local consultant here, who says, 'Do this and that, and there is a loophole here that is not plugged yet. You stand a definite chance to gain." Happy investor does it all like the consultant claims, the grinning consultant gets paid and is happy.
Two years later, the IT Department knocks on his US doors for he has done a transaction that would cause him to pay taxes, huge ones at that. Investor goes to the Consultant, who suggests a renowned lawyer who handles such cases beautifully. The case goes on till the Supreme Court, takes three years and over to reach there, and finally the verdict is handed over to the Investor. The law firm goes to the investor and says, 'No Taxes.' Wow, or so thinks the investor, when a retrospective amendment in law makes the transaction taxable. Now, this guy breaks down, well almost.
The consultant earned, the lawyer earned, now the IT Department stands to earn. Good for India, bad for the investor, and subsequently, bad for India. Now, the investor logs into twitter to damage the country for being a #TaxHell. Maybe, an amendment prospectively would have been a good choice to avoid India being a tax hell, let alone being amidst tax havens.
Ok, this calls for a conclusion to patient readers of the article. If rules are made once, amendments should be made only with prospective effect, how so ever it causes losses to the country. Remember the roadside kid who was captain of the opponent cricket team, who changed rules to his benefit when things seemed to be going awry for him, by adding ten runs to his score? Well, India is very much on it's way there. India may say it is highly organized democracy when even the country's autos cannot run on an organized fare system. Auto-crazy Demo-crazy.
*Retrospective Effect is a case when you enter a hotel, order a dish, taste it, find it is stale. Nevertheless, you eat most of it. With just one bite left, you ask the waiter to take it away angrily and give you a fresh one instead. 'Or I will speak to the manager. Where is the manager?'