Some relief on retro tax

FM clarifies firms free to use arbitration window

Finance minister Arun Jaitley’s clarification on Sunday that the recent notices sent to companies fighting the levy of retrospective taxes were more in the nature of following routine procedures, is reassuring though it is unlikely to completely dispel investors’ fears. The minister explained that the notices—one to Cairn Energy and the other to the Vodafone Group—were ‘pre-existing assessment orders’ and, therefore, needed to be dispatched so as to pre-empt questions being raised by the CAG or the CBI. Be that as it may, for companies to be convinced the government isn’t upping the ante, even while at least one of the cases is under arbitration, it must desist from any action such as seizing a firm’s assets, even if it risks being admonished by the CAG or CBI. The notice to Vodafone Group in mid-February said the the UK-based MNC must cough up R14,200 crore or its assets may be seized. While the finance minister may want to sound reassuring, multinational corporations will remain unsettled by the government’s somewhat inconsistent approach on tax matters; that MNCs are discomfited by this was evident from a statement from Vodafone, following the tax notice received by it, which said it ‘seems a complete disconnect between the government and the tax department’ in a week when prime minister Narendra Modi was promoting a tax-friendly environment for foreign investors.

The government may be reluctant to reverse the retrospective taxation statute since it has already been passed in Parliament, for fear it will be labelled a suit- boot ki sarkar. But even otherwise, its approach can hardly be described as investor-friendly; not so long ago, the finance ministry wanted to levy a MAT retrospectively on foreign portfolio investors, and it was only after the AP Shah committee recommeded otherwise that it pulled back. The government has now proposed a one-time settlement to resolve retrospective tax cases—companies need to pay only the principal tax and can get a waiver on interest or any penalties—that opens on June 1. Jaitley said on Sunday that the government would not ‘coerce’ any company to do so. The minister also mentioned other schemes to resolve various kinds of tax cases, an approach that is welcome since prolonged litigation helps neither the assessee nor the tax authorities. However, where large corporations are concerned, the government must play fair. And it must back off if it can like it did by not contesting the judgements on the Vodafone and Shell transfer pricing cases in the Bombay High Court.