There is glory in owning mistakes of the past and making amends to ensure that it no longer remains a bone of contention. The Finance Minister of India, Ms. Nirmala Sitharaman, has set a good example for the rest of the world.
She tabled a bill in the Lok Sabha that ends a dispute that has been dragging for 9 years!
What was the dispute all about? What does its resolution mean for India and its corporate citizens?
Read on.
Suppose you are an Indian resident who owns a house in India. Now, if you sell this house to someone else and make a profit out of it, you will have to pay the taxman their cut, in the name of Capital Gains Tax. Why?
You made profits in India. So isn’t it your duty (and obligation) to share a portion of the profits for the nation’s development?
Yeah. That’s why.
Many foreign entities also owned assets in India which they transferred to other foreign entities. Vodafone acquired Hutchison’s India operations. Cairn transferred its Indian entities internally to its other subsidiaries.
(to understand Cairn and Vodafone’s case in details, check this out)
Now, the government of India felt that these companies made tremendous gains with the transaction. But, they had found loopholes in the tax laws and did not pay any taxes.
Annoyed by what was going on, the government first asked Vodafone to pay up. Vodafone obviously did not agree to this and the case was dragged to Supreme Court. But, the government lost the battle!
Furious at its defeat, the government changed the law retrospectively in 2012. Meaning, the law would apply to every transaction that has happened since 1962.
The changed law roughly states, whichever transactions, be it international or within India’s borders, if it involves assets in India, it will be subject to taxation in India.
Yes. If you lose a game: change the rules of the game.
Seeing an opportunity to mint more money, they also demanded taxes from 16 other companies (Cairn being one of them).
And because of all this, a whole host of drama has been ensuing between the MNCs and the government for almost a decade.
Especially in the case of Cairn and Vodafone.
The government seized the assets of Cairn > Cairn dragged the government to international forums for arbitration > the government lost its face in international forums > Cairn attempted to seize assets to recover what the Government had earlier seized from it.
Phew!
All roads were blocked for our Government and everyone kept wondering, why won’t it budge!?
But finally, to everyone’s delight, the Government stopped pushing its stance further and decided to drop the retrospective application of the law on transactions that happened before 2012.
In its acceptance of defeat, it won the hearts of the people all over. The retrospective tax law had set a bad precedent for the investors who are willing to pour money into India. It gave out a signal that even if the investment makes sense now, the government could any day change the law retrospectively and ask you to pay up. This image had to be changed. In the words of Nirmala Sitharaman,
“The country today stands at a juncture when quick recovery of the economy after the pandemic is the need of the hour, and foreign investment has an important role to play in promoting faster economic growth and employment.”
The government has agreed to pay back anything that it had previously taken under the law. However, it won’t pay any interest amount on that. Well, the corporates can compromise that much, no?
Well, well. Cairn is rightfully owed $1.7 billion by the government. If it were to forgo interest on that amount (without any fault of its own), imagine the kind of loss it will be suffering!
It feels like a bitter-sweet moment for Vodafone. Right since it entered India, this one dispute has always kept its name in the headlines.
And now, when Kumar Mangalam Birla and Vodafone PLC have decided to forgo stakes in Vodafone, and it seems to be the end of road for them, they have won the case. In fact, Vodafone’s share prices surged by as much as 19% after this news. A very poetic tragedy, no?
While this amendment looks like a step in the right direction for the future of corporate India, it will be interesting to see the reaction of the corporates that have suffered for so long.
Until then…
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