CII echoes concerns on retrospective tax changes

Livemint, May 01, 2012

Not known for taking hard anti-government positions—no matter how justified—India’s most powerful industry lobby, the Confederation of Indian Industry (CII) has closed ranks with foreign investors and objected to, in a draft note, the government’s move to effect retrospective tax amendments and its failure to insert safeguards in the proposed general anti-avoidance rules (GAAR).

Interestingly, the draft note, being circulated by representatives of Vodafone, sees the lobby taking the side of the telco and asking the government do away with one retrospective amendment that could mean an outgo of around $4 billion (Rs.21,000 crore) in taxes, interest and penalties for the UK-based company.

A CII spokesperson did not deny the existence of the draft note, but maintained that the lobby had not made any submission to the government.

Pradeep S. Mehta, secretary general of consumer advocacy group CUTS, said that without going into the merits of the issue, he thinks industry lobby groups should have an independent view on such matters. “They should not be cowed down by the government’s stand,” he said.

CII has also asked the government to introduce sufficient safeguards in the GAAR provision because these could otherwise severely impact foreign investment coming into the country. Under GAAR, any arrangement made between entities to deliberately avoid tax can be invalidated, and the tax department is empowered to probe any transaction that it views as structured to avoid tax.

“Such amendments give rise to deep uncertainty and instability in the tax system and significantly erode the investors’ confidence in India as a stable tax jurisdiction, especially when India has begun to develop the image of a stable market,” said the CII note, which has been reviewed by Mint.

Vodafone and the Indian tax authorities have been at loggerheads ever since Vodafone International Holdings BV bought the Indian business operations of Hutchison Telecommunications International Ltd (HTIL) through the sale of a Cayman Islands-based firm called CGP Investments (Holdings) Ltd, a unit of HTIL, also incorporated in the Cayman Islands, a tax haven. The tax department estimated the phone company’s tax liability at more than Rs.11,000 crore ($2 billion).

In a 20 January verdict, the Supreme Court ruled in favour of the telco, saying that the tax department did not have the jurisdiction to tax the transaction. Following the judgement, the government brought in a retrospective amendment to bring similar transactions into the tax net. The government estimates it will get around Rs.40,000 crore in taxes through these changes.

CII’s note has also argued that although other countries have gone in for retrospective amendments, these never seek to overturn a verdict of the country’s highest court. “Retrospective amendments have been curative in nature to ensure consistent application of law,” it said.

The letter also cites McKinsey estimates that say that the cumulative foreign direct investment between 2012-13 and 2015-16 was projected to be $161 billion based on the trend of the last six years, and that due to the uncertain environment, this is now projected to be around $74 billion.

The note also criticizes the lack of safeguards in the GAAR provisions made in the Finance Bill, which are “likely to cause unnecessary anxiety amongst investors, including private equity investors, due to the uncertainty and unpredictability of what the Indian tax authorities may do to invoke the provisions”.

CII has asked the government to take into account the recommendations of the parliamentary standing committee of finance on the Direct Taxes Code Bill before finalizing the GAAR provisions.

The industry lobby has suggested substantial dilution in the GAAR provisions. Its recommends that GAAR should only be invoked when the sole purpose is tax evasion, the onus to establish proof should lie with the tax department and not the taxpayer, and that the GAAR panel should have two independent members. It has also recommended that all existing structures and arrangements be outside GAAR’s purview.

While the government is considering bringing one independent member on the GAAR panel and defining a threshold, it is unlikely to exempt income generated from existing structures with effect from 1 April this year.

“Income accrued before this year will not come under GAAR. But income generated from existing arrangements will come under scrutiny. They are not going to be exempted,” a finance ministry official said. “We are also considering the demand of foreign institutional investors (FIIs) to put the onus on the tax department to prove tax avoidance,” added this person, who did not want to be identified.

The introduction of GAAR, which will make FIIs liable to pay short-term capital gains tax in India, had invoked widespread opposition from foreign investors.

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