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Updated: May 9, 2012 01:57 IST

We cannot declare India a tax haven to attract FDI: Pranab

Special Correspondent
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Finance Minister Pranab Mukherjee speaks in the Lok Sabha on Tuesday.
PTI Finance Minister Pranab Mukherjee speaks in the Lok Sabha on Tuesday.

A day after announcing the deferment of the implementation of GAAR (General Anti-Avoidance Rules) to the next fiscal, Finance Minister Pranab Mukherjee on Tuesday said there would be no going back on taxing Vodafone-type transactions and asserted Parliament's right to amend the relevant laws with retrospective effect to ensure that India was not treated as a tax haven by foreign investors.

In his reply to the debate on the Finance Bill, 2012 in the Lok Sabha, Mr. Mukherjee put up a spirited defence of his tax proposals — especially the retrospective amendments — saying that while the judiciary has the powers to interpret the law, the legislature has the right and authority to carry out the necessary amendments so that corporates cannot get away without paying tax by virtue of operating from a tax haven.

“I am fully aware of my right as a legislator, law-making power only vests in Parliament. The Supreme Court may interpret law but equally Parliament has right — legislative right — to express its intention by making amendment to correct the SC judgement,” Mr. Mukherjee said, amidst all-round thumping of desks.

Ostensibly irked at the concerted campaign globally and at home against taxing Vodafone on its acquisition of the Hutchison stake in Hutchison Essar in 2007, Mr. Mukherjee noted that he would like to be guided either by the DTAA (Double-Taxation Avoidance Agreement) or tax and sought to convey a firm message to those who had been harping on the negative impact that such a tax would have on the country's FDI (foreign direct investment) inflow.

“There cannot be a situation that somebody will make money on an asset located in India and will not pay tax either in India or to the country of its origin… because of making some arrangements through certain tax haven areas through a complicated setting up of series of subsidiaries and having huge capital gains on the assets located in India,” he said.

‘India is entitled'

In a forceful argument, explaining the purpose of the retrospective amendment in tax law in the wake of the apex court's verdict on the Vodafone case, Mr. Mukherjee pointed to an amendment of a similar nature in the United Kingdom in 2008 with retrospective effect from 1987 and said: “If they are entitled, then surely India is equally entitled. India is not an inferior country compared to anyone.”

Rebutting opinions that such a tax would deter foreign investors, Mr. Mukherjee said India had a high domestic savings rate and, despite the current negative environment owing to high current account deficit, it was not in such a “desperate” situation.

“We cannot declare India a tax haven simply to attract foreign investment. Please remember, when the investment was also not there we did not eat lizards. Till today, the investment required is substantially met by our rate of domestic savings. Therefore, we are not in that desperate a situation that a country of 120 crore people will be treated as a tax haven like Cayman Islands, Isle of Mann or Virgin Island. We cannot be equated with them. Either pay tax here or you pay tax in your own country with which we have DTAA” he said.

Relief in duties

In the course of his reply, the Finance Minister also announced some relief in excise and customs duties. Central excise duty concession would be extended to chassis for commercial vehicle, ball-point-pen ink, polyester fibre and yarn made from waste, and certain parts of footwear. Duty exemptions on the customs side cover items such as wood pulp, goods required for the setting up of solar power projects and raw materials for the manufacture of the solar cells.

The Lok Sabha later passed the Finance Bill to give effect to all the tax proposals, marking the completion of the three-stage budgetary process. The Bill will now go to the Rajya Sabha, which will return it for Presidential approval.

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Indians are very gullible and they can be easily distracted from their own self interest. India
needs taxes desperately. westerners are by nature maximize their self interest. Especially
when it comes to third world countries, european and US companies have mastered the way
of not paying any taxes. If things don't go their way, their govt and the international agencies
which are controlled by them will start threatening India. They will succeed one way or the
other. All their govts and international agencies will gang up against India. It will be very
difficult for Indian politicians to withstand the pressure. Already rating agencies have brought
ratings below Ireland and Spain threatening growth of India. When dealing with them you
need to think like them. English media in India is mainly owned by western people. dont fall
for their games. Think like them and ask yourself what they would do if they were in our
shoes.

from:  Suresh
Posted on: May 10, 2012 at 05:49 IST

@vijay: You are the one sounding ignorant. The point is that the shares transferred were of a foreign registered entity. Until this transaction, the tax laws were not interpreted in this manner even by the IT department - the verdict of the Supreme Court proves that the tax demand did not have any precedent from 1962 despite the fact that innumerable cases may have occurred. It is vendetta to issue a retrospective clarification to a law after the Supreme Court rules against the government. Vodafone is not responsible for making laws; the Parliament is, and the government is. Manmohan Singh, Pranab Mukerjee, and Chidambaram have been FMs of this country for the majority of years since 1991, the year of liberalization. Did they not understand that FDI through holding structures would result in this situation? They are now covering up their negligence with bravado. Retrospective laws are not good at all; changing rules of the game after it is played by one participant makes it a mockery.

from:  Thomas George
Posted on: May 9, 2012 at 18:41 IST

For the 1st time, Our FM had spoken positively for India growth and Development......I support Pranab in this issue.

from:  Murali krishna
Posted on: May 9, 2012 at 18:27 IST

@James Gurung Pity your ignorance. When someone buys an asset, he has to make allocation for tax in that proposal/payment. That is the law of the land. Suppose you buy a product from a shop, it is the buyer who has to pay the VAT or Sales Tax. This might be a crude analogy but think should give you a perspective. In that sense it is clear that Vodafone has to pay the tax and what the FM has told makes complete sense. Kudos to the FM for acting strong (at least in this matter).

from:  vijay
Posted on: May 9, 2012 at 17:31 IST

I congratulate Pranabji for upholding the State above all even in the capitalist atmosphere. This is due to birth in a socialistic society. Pranabji, please try to bring our money stashed outside and we can invest all over the world. As a congressman, is it possible...

from:  G.Selvaraju
Posted on: May 9, 2012 at 16:24 IST

I appreciate the action of FM. He is right in doing so. When every
organisation has got a duty to give it to the Society, no one can escape
from sharing their genuine profits by way of paying taxes. In fact CSR
activity is going on well in international level over and above the tax
payments. Why Vodafone can't pay taxes? It is a good speech and I liked
FMs position on the issue as a responsible Minister and citizen.

from:  CA RAMAN R M.Com
Posted on: May 9, 2012 at 11:06 IST

We are not lucky to get Pranab Mukherjee as our PM!!

from:  C S Sundaresha
Posted on: May 9, 2012 at 08:23 IST

There was enough time from 1991 when large scale FDI was allowed to amend this law appropriately. Retrospective amendment of a law to circumvent a judgement of the Supreme Court makes it vendetta.

from:  Thomas George
Posted on: May 9, 2012 at 07:54 IST

Well done! Mr. Minister. If people are serious about business and the Indian growth
story then they will come. If they do not come then we know the problem which we
must face -- we will face it.

from:  Raghav Bose
Posted on: May 8, 2012 at 22:20 IST

finally, our minister said something bold! I completely agree with this
statement. Unlike many other tax haven countries, India cannot afford it
because we are feeding 1.3 billion people in this subcontinent. And
govt. should tax the income in order to make govt. revenue. I must say
Bold move Pranab sir.

from:  mgk
Posted on: May 8, 2012 at 21:43 IST

It sounds good!!! India can not be allowed to make tax heaven just to attract foreign investment but at the same time the finance minister must deliver on public expectations and come up with clear policy to bring back money stashed in the tax heaven countries.

from:  Rajeev Kumar
Posted on: May 8, 2012 at 21:41 IST

Finally Indian government making a good decision. This would be a right
indication to foreign multinationals to get their acts together when it
comes to their tax commitments.

from:  Venky
Posted on: May 8, 2012 at 21:27 IST

it is right to say that India is fighting with our telecom industries
but why there is not short term outcome being come out if you think Vodafone is distracted your norms then take proper action against,
because your delay is increasing the unemployment in India due to your
pending decision the company is not able to focus on there financial
growth and is not able to expand there business so no hiring of the
employ is conducted as a result the fresher has to suffer, let the
company work in freedom don't destroys the future of young generation

from:  Shubham Sharma
Posted on: May 8, 2012 at 21:13 IST

Hutchison Essar was 67% owned by Li Ka Shing Group and 33% by Essar.
Vodafone bought the 67% stake by Li Ka Shing for $11.1bn in 2007. In
2011, they bought the 33% stake from Essar for $5.46bn, the same
valuation as in 2007.

Vodafone, as the buyer has made no profit in the deal. It is the
buyer. 67% of the profit has been made by Li Ka Shing group (the 1st
seller) and 33% of the profit by Essar (the 2nd seller), in 2007. So,
why does Vodafone have to pay $2.5bn tax? It is against any kind of
common sense. So is our finance minister´s pronouncement.

from:  James Gurung
Posted on: May 8, 2012 at 20:56 IST
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