The stage, it appears, is being set for giving the issue of retrospective taxation, introduced in the last Budget, a quiet burial. The Parthasarathi Shome committee, originally constituted to frame guidelines for General Anti Avoidance Rules (GAAR), was handed the additional mandate of examining the taxation principles on transfer of shares in a foreign company with underlying assets in India. The immediate provocation for this was the furore over the retrospective amendment to tax laws in the last Budget that rendered Vodafone liable to pay a tax of Rs. 11,200 crore despite the Supreme Court ruling in its favour early this year. Amidst threats that this amendment would permanently antagonise foreign investors, Prime Minister Manmohan Singh referred the issue to the Shome committee well after the man who started it all in the Budget, Pranab Mukherjee, was safely settled in Rashtrapati Bhavan. The committee has now delivered its draft report, which should be music to the ears of Vodafone and other foreign investors. If accepted, the recommendations will completely nullify the Budget proposal and let not just Vodafone off the hook but also foreign portfolio investors investing in the stock market through the undesirable route of participatory notes (P-notes).
The committee has rightly said that the retrospective application of tax law should happen in the rarest of rare cases and for one of three reasons only: to correct anomalies in the statute, to matters that are clarificatory in nature such as technical/procedural defects that vitiate the substantive law and, lastly, to protect the tax base from abusive tax planning schemes whose main purpose is to avoid tax. Yet, in a touching display of affection for Vodafone, Mr. Shome’s report says that even in the exceptional situations where the law is applied retrospectively on the indirect transfer of assets, the taxpayer in question should not be slapped with interest and penalties on the tax deemed as payable. The grounds? There should be “no undue hardship caused to the taxpayer” even if the taxpayer in question is guilty of aggressive tax planning — a concession that is not extended to common taxpayers who are penalised even for small lapses. The Shome panel may also have given a leg-up to foreign portfolio investors using the P-note route, which has been frowned upon by the stock market regulator SEBI, as it hides the identity of the investor. This route has been used by industrialists to rig up their share prices in the recent past and SEBI had placed temporary restrictions on P-notes a couple of years ago. Given this, it is surprising that the committee has now recommended that they should not be taxed.
Keywords: SEBI, GAAR, Finance Ministry, Parthasarathi Shome panel
Can someone please explain me in details what the retrospective taxation is all about?And what has the committee report to say about it? And what has it to do with hutch- Vodafone companies? I admit I am being naive, but I really need to know all this. Thank You.
The present government sees economic progress through stock market numbers and hence they will do all tricks to keep it afloat. It has been proved beyond doubt many a times that P-notes is a malaise to a healthy stock market as they come from unknown sources and have been linked to terrorist activities in the past.
the author, with due respect, has obfuscated the facts while writing this article. the Committee has never said that aggressive tax planning measures should be allowed. On the contrary, it has justified the use of retro amendments to tackle such aggressive tax planning. it only seeks to exempt payers of income from being held vicariously liable. Remember, it was Hutch and not Vodafone that made the $$ out of the deal. So retro amendments should be used to attack the recipient of income, e.g. Hutch who has earned huge gains and not payer, e.g. Vodafone who is not at fault for not deducting tax in accordance with the law as it prevailed then.
Letting off Vodafone by Shome panel shows us as a banana republic. Why
corporates owned by foreigners are given special treatment and also the
non-taxation of pnotes is regressive as it will aid black money and
terror money into the stock market. How Mr. Shome is sure that all the
money coming through pnotes is right. This is half baked report to
satisfy the ego of the corporates. Disappointing and must not be
implemented.
The Shome panel is only trying to correct an earlier error which could adversely affect future
FDI. The retsrospective change was one of the worst mistakes to begin with, not its repeal. It
was also an excercise in peevish petulance at being successfully challenged in a court of
law. Shome panel was tasked with changing this perception. They have done what they
could given the reality that a change in the law is not likely to find any support. The editorial
conflates tax avoidance with black money round-tripping theough PN route. The argument
that the retrospective amendment would stop the abuse of the PN route is as mistaken as it
is disingenuous. It is a public secret that PN route is used by "promoters" to bring back their
black money and to increase their control and holding. Retrospective and whimsical taxation
changes can not combat this; relentless pursuit by SEBI of the sources behind the PNs can.
We must stop seeing FDI as evil by definition and learn to benefit from it.
As far as p-notes are concerned they do arouse a suspicion as
they may cause volatility in the market. Given the anonymity of
underlying investors in p-notes, SEBI will find it hard to
insulate market form ill-purpose investments.
Vodafone case poses question of legitimacy rather than legality.
It is legitimate to do retrospective amendment but given the
pressure mounted on Indian Government through various rating
agencies and aggressive lobbying, government is falling short on
action. One can only hope that our politician won't budge to
these market forces. Though given the recent history of this
government, it is very unlikely.
As stated in the editorial, the provision in the last budget for retrospective taxation - specially made for blocking all the escape routes likely to be available to Vodafone for avoiding tax payment- will certainly have a silent burial if the Shome Committee's draft report is accepted by the government. Result: Vodafone will become the immediate beneficiary. What, however, lacks logic in the report is the specific recommendation that interest or other penal charges should not be collected even in rarest of rare cases wherein resort is made to retrospective taxation, because, as rightly pointed out in the editorial,such concessions are not extended to the common tax payers,though the lapses on their part might be very minor in nature. This definitely warrants some careful re-thinking.
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