In what came as a relief to foreign investors and indicated New Delhi?s willingness to find a middle ground on the high-profile Vodafone tax issue, finance minister P Chidambaram on Monday announced a ?review? of recent retrospective amendments to tax laws and promised a ?non-adversarial tax administration?.
?I have directed a review of tax provisions that have a retrospective effect in order to find fair and reasonable solutions to pending as well as likely disputes between the tax departments and the assessees concerned,? Chidambaram said, reading out from a statement,with the newly designated revenue secretary Sumit Bose on his right.
Stating that investment was key to restart the economy?s growth engine and ?investment is an act of faith?, he said corrective measures would be taken wherever necessary to provide clarity in tax laws and a stable tax regime.
The new finance minister?s statement reinforces the belief that the government is inclined to take a broad-based, consultative approach to a host of tax measures that have annoyed foreign investors. Prime Minister Manmohan Singh recently asked expert panels to define the general anti-avoidance rules (GAAR) and the safe harbour rules for transfer pricing through extensive consultations. He also initiated a review of the taxation of the IT sector.
?These developments are characterised by definite deadlines, which indicate the government means business,? said Uday Ved, KPMG?s head of tax.
Chidambaram?s statement is seen by investors as reflecting a favourable shift in the government?s approach, as his predecessor Pranab Mukherjee had stoutly defended retrospective changes in tax laws.
The policy shift also comes at a time when tax demands on past overseas share transactions such as the 2007 Vodafone-Hutchison are pending. The government had demanded that Vodafone pay $2.2 billion in taxes over the sale of Hutch-Essar. Although Vodafone is unlikely to get a full reprieve, the government could take a more conciliatory view, analysts said.
The retroactive amendment to the Income Tax Act introduced in the Finance Bill 2012 by Mukherjee is now part of law.
The retrospective amendment had widened the scope of the deeming provisions in the law ? Section 9 of the Income Tax Act ? that allowed authorities to tax capital gains on shares of companies incorporated outside the country if they have an economic nexus in India. The amendment also retrospectively made the acquirer of shares ? Vodafone in this case that bought Hutchison Whampoa?s Indian mobile business in 2007 for $11 billion ? liable to deduct tax before paying the sellers.
The apex court said Indian authorities did not have powers to tax the 2007 Cayman Islands deal that paved the way for the Vodafone Group to enter the Indian mobile phone market. To get around the apex court ruling, the clarificatory amendment suggested the legislative intent was always to tax such deals.
Chidambaram said that since investment is an act of faith, the government must remove any apprehension or distrust in the minds of investors. Chidambaram also said fears about undue regulatory burden or regulatory overreach would be removed by talking to investors about the policies. He said that more measures would be taken in due course to reassure investors. ?It is our intention to raise the level of investment to 38% of the GDP that was achieved in 2007-08,? he said.
The government is aware that foreign investors do look at economic indicators such as exchange rate, which witnessed high volatility in recent past. Chidambaram said although volatility has reduced in recent weeks, the ministry intends to ?finetune policies and procedures? that will facilitate capital flows into the country.
Earlier, prime minister Manmohan Singh, who briefly held the finance portfolio after Mukherjee demitted office to run for the President, had asked a panel led by Partho Shome to hold wide consultations and finalise GAAR which too was introduced by Mukherjee this year. The government is clear that it cannot afford to antagonise investors with tough measures when they are risk averse due to the macroeconomic uncertainty.
Chidambaram also said he would encourage Indian companies, particularly, state-owned ones with large cash balances, to resume investments. The foreign investment promotion board that processes proposals that need government clearance, will process pending ones expeditiously, he promised. ?The key to restart the (economy?s) growth engine is to attract more investment, both from domestic and foreign investors,? he said.
