Around this time last year, tax officials were on overdrive. After the then finance minister had even given in to their demand and reversed the Supreme Court verdict on Vodafone through a retrospective amendment, taxmen started making high-pitched adjustments to the incomes of MNC arms in India—while a mammoth R44,000 crore was added to the incomes of MNC arms in FY12, this amount jumped to an even higher R70,000 crore in FY13 which means, using an effective tax rate of 25%, MNCs were asked to pay an additional R17,500 crore of taxes in FY13. Given the FY13 adjustments were only for the period till FY10, a lot worse lay ahead.
While the government paid little heed to industry protests initially, or even those by the government of the countries the MNCs were located in, with investment levels tanking in the economy, there has been a sea change in the way the taxman is trying to fix his image. For one, while no other country has tried something so ambitious, India has notified ‘safe harbour’ norms, virtually committing the taxman to accepting tax returns as correct if they declare a certain level of profits in certain types of industry. There are also Advance Pricing Agreements (APAs) through which companies, and taxmen in different countries, agree on how certain transactions are to be taxed—India has started moving aggressively on this. But, given the stock of disputed returns, clearing bad blood takes time. The problem is that MNCs and various governments have little faith in the tax redressal system. The US, for instance, was reluctant to sign APAs with the Indian taxman, making it impossible for, say, a Microsoft—which had a problem with the Indian taxman—to sign an APA since this meant the US tax authorities may not give it credit for some of the taxes paid in India. There is, for instance, a Mutual Agreement Procedure (MAP) in which tax officials of two countries—the US and India for Microsoft for instance—sit down and try and sort out a problem. While MAP discussions have been moving apace for several countries, India has a mammoth 175 MAP cases pending with the US and 25 with the UK with the amounts involved running into tens of thousands of crore. While finance minister P Chidambaram tried to bring things back on track by removing the head of the international tax division in July—he was transferred without