August 9, 2021
Government gives up
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Good morning. Vaccination seems to be the best way to fight COVID 19. Therefore, governments are coming up with several plans to encourage everyone to get vaccinated.
The UK government, in its new measure, has come up with a creative plan. Youngsters are being asked to get vaccinated if they want to get back their lost freedom and enjoy their night outs.
The cheer logo goes – ‘Vaccinate together and Dance together’. Oh, we’re definitely together in this!
📰 FEATURE STORY
Retrospective Tax – UPA versus NDA
Since last Thursday, most of the business updates have been about the imminent end of a strict tax era in India. People are talking about how the scrapping of the retrospective tax policy is a huge move on reversing a past mistake. But what is the retrospective tax? Why is this move to remove retrospective tax appreciated?
The word ‘retrospective’ means ‘looking back over the past.’ That is exactly what the retrospective tax did. It charged an extra amount to the companies in India for the transactions they did in the past. So basically, the government could pull up a past business transaction and ask the profiting company to pay tax for their old deal.
This was the basic provision of the retrospective tax. The then-Finance Minister Pranab Mukherjee argued that the tax was in the best interest of India. But several think tanks, businessmen and even foreign countries opposed this policy.
Last week, current Finance Minister Nirmala Sitharaman announced that the government will do away with the retrospective tax. She declared that all retrospective tax demands will be cancelled now. The government shall refund the principal amount to the companies who were forced to pay taxes because of this law.
It was on 28th May 2012, that the United Progressive Alliance (UPA) government introduced the retrospective tax. As we discussed, the policy was aimed at collecting taxes from previous transaction deals of companies situated in India. Now, you might wonder why this law was introduced. Let’s look at the infamous Vodafone case that was seen as the reason behind this policy.
In 2007, Vodafone paid $11.2 billion to acquire 67% shares of the telecom company Hutchison Essar, which is a foreign company situated in India. The deal between the two foreign companies was closed in the Cayman Islands. All went well and the company was happy with its acquisition.
But things took a turn for Vodafone in 2009 when the Income Tax (IT) department served them a notice for not having deducted the tax at source for its huge $11.2 billion transaction. As the case went back and forth, the IT department imposed a penalty of ₹7,900 crores on Vodafone. The international company approached the High Court, which reiterated the IT department’s claims. But in January 2012, the Supreme Court quashed the tax demands and said that the company did not have to pay the huge penalty.
Following this ruling, the then Finance Minister Pranab Mukherjee amended the Income Tax Act so that the retrospective tax could be introduced. After this was done, the government asked Vodafone to pay its taxes. This time the company was legally bound to make the payment, but they opposed it. Since then, they have been fighting the case against Indian government in foreign tribunals.
The recent decision to cancel the retrospective tax for transactions that took place prior to 2012 comes as relief to Vodafone and 16 other companies. But before jumping to any conclusion, we’ll have to look at both sides of the story.
Why did the UPA government introduce the policy?
The UPA government claimed that the retrospective tax was introduced only to benefit the Indian economy. Let’s go back to the Vodafone case to understand how the policy is beneficial.
When the SC ruled in favour of Vodafone, it cited that there was no law that requires Vodafone to pay the tax. But the finance ministry believed that as per the intent of the Income Tax Act, the company had to pay tax. Even though the transaction was between two foreign companies, the assets were drawn from India and so they had to pay tax.
However, the SC order forbade the government from collecting this tax. So, the former Finance Minister Pranab Mukherjee made an amendment that was retrospective (dated backward) from 1962 and asked Vodafone to pay the required tax amount. The ministry said that the amendment was done only to clarify the intention of the law. It argued that it was only asking the company for its due share of tax.
Pranab Mukherjee claimed that India was not a tax-free country. Since Vodafone created an asset based in India because of its acquisition, it had to pay the tax. He said that the retrospective tax would bring in tax certainty as investors would no longer be able to dodge taxes. Also, by asking companies to pay tax for previous deals, the country will regain its lost revenue. He thus argued that the policy was introduced in the fiscal interest of the country.
He clarified that the policy would not affect foreign investments. According to him, foreign investments were not solely based on tax policies. The huge size of the market, cheap skilled labour and low operation cost in India would drive investments. So, he said that a tax policy that equally applied to domestic and foreign investors will not deter foreign investments.
Finally, Pranab Mukherjee said that as per the policy, only those transactions that happened 6 years before the policy would be reopened. Additionally, he said that the transfer pricing mechanism will be checked before imposing taxes on the company. This way, the companies will be saved from any chance of harassment.
Why did the NDA government decide to scrap it?
Ever since the NDA government came into power in 2014, they have been against the retrospective tax. The former Finance Minister Arun Jaitley had brought up the matter and declared that no new cases would be filed under the retrospective tax. Only the pending cases were followed up by the government. So we can say that the government has clearly been hinting that this law would be amended.
As to why the NDA government has decided to scrap it, there is a list of reasons. This tax policy had damaged India’s reputation as an investment-friendly country. It had imposed huge taxes on foreign companies which were involved in indirect transfers. Naturally, it deterred foreign investments in India. So the government thought that if this policy is removed, the tax rates will become more attractive for foreign investors. This could pave way for more foreign investment in India.
Another important reason was that the policy had threatened tax certainty. A sudden amendment in 2012 disrupted the routine of many companies. They were asked to pay more money than what they had expected during investment. Such an unpredictable investment climate could discourage many foreign investors. In order to avoid that situation, the government has decided that a predictable tax regime is important. The removal of retrospective tax would guarantee that there is tax certainty.
Moreover, due to the retrospective tax policy, many companies like Vodafone and Cairn had filed their cases against the Indian government in foreign tribunals. This led to the Indian tax law being adjudicated by other countries. The Indian government did not like this. They felt that the Indian law should deal with their tax cases and there was no need for arbitration to take place. Therefore, the most viable solution was to remove the retrospective tax that was the root of this problem.
This decision of the Modi-led government is expected to accelerate the economic recovery. It is anticipated that the repeal of the retrospective tax law will lead to more foreign investments which, in turn, will boost the economic development of the country.
🕵️ BEYOND ECHO CHAMBERS
For the Right:
Ministers to Hockey India, all are quiet on casteist attack on Dalit player Vandana Katariya
For the Left:
Women do not want to be judged for indulging in fashion on their Big Competition Days
🏴 STATE OF THE STATES
Tribal coffee (Odisha) – In a win for tribal people and their upliftment, India’s largest coffee producer Tata Coffee has agreed to source coffee beans from Koraput district’s tribal farmers. Koraput coffee, grown in eight blocks in the district, is being marketed by the state government’s Tribal Development Co-operative Corporation of Odisha Limited (TDCCOL), after the request from Koraput Agro Products Producer Company Limited (KAPPCO). This shows the power of cooperation between the government and the private sector in uplifting the lives of marginalized sections of our society.
Permitted (Ladakh) – If you are planning to go on a trip to Ladakh, here’s some good news. The government has done away with Inner Line Permits (ILP) for Indian nationals. ILPs were issued earlier for tourists entering notified protected areas of Ladakh, including Nubra Valley, Khardung La and Pangong Tso. Well, what are you waiting for? Prep your Royal Enfield for an epic adventure!
Defence corridor (Tamil Nadu) – The state seems to have upped its game in attracting companies from the defence sector. Investments worth ₹2,116 crore have been made in the Tamil Nadu Defence Industrial Corridor (TIDCO) since its inception in January 2019. Minister for Industries Thangam Thennarasu said that the state recently signed an MoU with GE Aviation to establish a Centre of Excellence (CoE) worth ₹140 crore. The CoE will deal with the design and development of aircraft engine components. He further noted that more such CoEs were in the pipeline. It is definitely a boost to the ‘Make in India’ initiative.
Devastation (Madhya Pradesh) – Chambal-Gwalior region of the state has witnessed devastating floods over the past few days. While 24 people have lost their lives, more than 29,000 people have been evacuated to safer areas. While the government says that it is trying everything within its power to help the residents, the locals say that it is not enough. Union Agriculture Minister Narendra Singh Tomar, an MP from the region, had to face the brunt of the local people’s angst after they staged a protest while he visited a flood-affected area on Saturday. As a fallout of this protest, the District Collector and the Superintendent of Police were transferred on Sunday. Hope the government addresses all the concerns of the residents at the earliest.
Warriors, no longer (Gujarat) – Doctors in Gujarat feel short-changed by a decision of the government. The state government requires medical students to serve in rural areas for a year after graduation (after signing a bond). Due to the ongoing pandemic, the government stated that those who served a day in COVID duty would be considered as having served two days of bond duty. But after a drop in cases, the government rolled back this order. This led to the ongoing resident doctors’ strike in Gujarat. The government called this strike as illegal and threatened action against the doctors. The doctors, in turn, observed ‘Black Day’ against the government on Saturday. What will the government do next?
🔢 KEY NUMBER
87.58 metres – Distance Neeraj Chopra’s javelin travelled in the Men’s Javelin Throw Final in Tokyo Olympics 2020. This got him the Gold medal, a first for India in the athletics events of Olympic Games. Etch this number in memory, for this achievement is going to be remembered for generations to come.