Thoughts on retrospective taxation

by Manshu on June 2, 2014

in Uncategorized

The market has been doing quite well the past few months, and the hope is that the new government brings out policies, and clears roadblocks that further encourage investment, and in turn encourages FII money in the country, and help the overall economy as well.

With today’s globalized economy, it is no surprise that foreign governments and companies take as much interest in Indian policies as Indian companies themselves take, and one of the issues that has been coming up recently is retrospective taxation.

The most prominent example is the Vodafone case where the tax authorities wanted to charge capital gains on Vodafone’s acquisition of Hutchison Essar; the Supreme Court ruled in favor of Vodafone, and then the Indian government decided to change the laws relating to capital gains taxation accruing from cross border acquisitions where an Indian subsidiary is involved, and make that rule applicable retrospectively from 1962.

Since then Vodafone has decided to take this case to international arbitration as the dispute wasn’t getting resolved by other means.

The Japanese government has also brought up this issue recently with the Financial Express reporting that Japan has asked the current government to drop a $3 billion retrospective tax bill on Mitsubishi and Honda. 

Retrospective taxation is a bad idea and I hope the current government abandons the pursuit of tax revenues in this manner. This is changing the rules of the game after the game has long started and is grossly unfair. Imagine the uproar if someone raised the current income tax rate by 5% and made that retrospectively effective from the past 10 years, such a thing would never pass, then why force a foreign corporation to pay such a tax? For people who support the amendment saying it plugged a loophole, I think that is very weak ground – you can certainly plug a loophole for future purposes but it is incredibly unfair to plug a loophole retrospectively especially when that involves working around a Supreme Court judgement.

This is high handed behavior that certainly doesn’t encourage a positive investment environment, and sacrifices good long term policies and economic system for a short term gain to cover the revenue deficit, which it anyway failed to do.

Previous post:

Next post: