After Finance Minister Pranab
Mukherjee finished his Budget speech, I thought,
“That’s an unambitious and possibly do-able budget.
I’ll live with it”. Many others felt so, having
discounted a ‘bold’ budget under UPA-2.
Besides, Pranab-babu did some right things. Like
increasing the service tax rate from 10 to 12 per
cent, and taxing all services barring 17 heads in a
negative list. Like raising the Cenvat rate from 10
to 12 per cent. Like introducing some good proposals
to strengthen the investment climate, such as
allowing qualified foreign investors to access the
domestic corporate bond market; permitting two-way
fungibility in Indian Depository Receipts;
announcing Rs.60,000 crore towards issuing tax-free
infrastructure bonds; and allowing external
commercial borrowings to finance the rupee debt of
power as well as highway projects.
He also admitted to having blown the fiscal deficit
for 2011-12 by Rs.109,163 crore — from the budget
estimate of 4.6 per cent of GDP to 5.8 per cent. And
promised that by pegging subsidies to no more 2 per
cent of GDP, he would bring down the deficit for
2012-13 to 5.1 per cent of GDP. Then, a nuclear bomb
exploded. It was North Block’s revenge on Vodafone.
Remember 20 January 2012, when Vodafone won a
landmark Supreme Court judgement against the
Government of India regarding an income tax demand
of Rs.11,000 crore? It had challenged this demand
arising out of its deal to buy Hutchison Whampoa’s
Indian mobile business in 2007, and had appealed to
the Supreme Court after losing at the Bombay High
Court. The Supreme Court overturned the verdict,
with Chief Justice S.H. Kapadia stating that
government had no jurisdiction over Vodafone's
purchase of mobile assets in India as the
transaction took place in Cayman Islands between
Hutchison and Vodafone. He also said that stability
of business requires investors to know where they
stand.
Soon afterwards, there were rumours that the taxmen
would alter the Income Tax Act, 1961 (IT Act), to
ensure that nobody could avail of the existing
provisions, as had Vodafone. This they have done in
the Finance Bill accompanying the Budget. With
retrospective effect, going back fifty years, to 1
April 1962.
Read page 19 of the Explanatory Memorandum to the
Finance Bill, 2012, for income deemed to accrue or
arise in India. Section 9 of the IT Act provides
cases where income is deemed to accrue or arise in
India. Section 195 requires any person to deduct tax
at source before making payment to a non-resident if
the income of such a non-resident is taxable in
India.
The Memorandum says that “Certain judicial
pronouncements have created doubts about the scope
and purpose of” sections 9 and 195. Thus, the need
to amend these. Fair enough. The Finance Bill then
plugs all loopholes that can allow a transaction
between two foreign firms involving the sale and
purchase of any income earning asset in India
without paying capital gains tax, or withholding
tax. I can even buy that, provided it is
prospective. But it isn’t. Here’s the sucker punch:
“Amend section 195(1) to clarify that the obligation
to [make appropriate tax deductions] applies, and
shall be deemed to have always applied, and extends,
and shall be deemed to have always extended, to all
persons, resident or non-resident, whether or not
the non-resident has:
a) a residence or place of business or business
connection in India; or
b) any other presence in any manner whatsoever in
India.”
These amendments are retrospective from 1 April
1962. And we want foreign direct investment in
India? Fat chance after this law. Nobody will trust
us any more. Thank you, Pranab-babu, for such
wisdom.
Published: Business World, March
2012
