Retro tax row shows poor policy, dreadful governance
Two back-to-back losses rarely provide fertile ground for a home run, unless the winning formula is changed. That’s true of sports as well as cross-country arbitrations. The Indian government, having lost two tax disputes at international tribunals, should take note.
In September, we first lost the decade-old tax arbitration case between Vodafone and the Department of Income Tax, which demanded Rs 22,000 crore retrospective taxes. Three months later, we lost another tax dispute to Cairn Energy and the country has to pay Rs 8,000 crore in damages. Those with the knowledge of India’s retrospective tax regime will agree that moving on would have won praise for the government.
Instead, sticking to shoe leather statecraft, India yet again challenged the Vodafone ruling in Singapore. This is both poor policy and dreadful governance. It all began in 2012, when the then UPA government amended the Finance Act to circumvent the Supreme Court’s ruling favouring Vodafone and allowing retrospective taxation.
The move was considered investor-unfriendly, impacting investments and business sentiment. It created uncertainty regarding public policy and taxation laws, and encouraged taxpayer harassment. In 2015, the NDA government wasted no time in tossing retrospective taxation into the bin. While this was a welcome relief, the joy was short-lived as tax sleuths doggedly pursued past cases at international fora. At least now, authorities should give up before the country’s image is tarnished beyond repair.
One may argue that the objective was to mobilise funds and improve tax collections given the anticipated revenue shortfall. Still, it’s common sense not to fight battles that are seemingly unwinnable. Rather, officials should tackle domestic direct tax disputes, which on last count stood at a staggering Rs 9.32 lakh crore.
To free up tribunals and end prolonged litigation, the government rolled out the Vivad se Vishwas scheme this year, but the move saw a mere Rs 72,480 crore in collections as against expectations of Rs 2 lakh crore. Needless to say, it’s time to adopt a modern direct tax code to resolve systemic issues and ensure transparency.