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 A Terrible Act!

Omkar Goswami


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


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