India withdraws retrospective tax

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It seems that the union government has finally decided to extend an olive branch to global investors. Aiming to pour fresh investments into India as it limps back to normalcy, it announced the withdrawal of the provisions for retrospective taxation. The government has finally waived all retrospective tax claims against Vodafone and Cairn, giving the undertaking to withdraw all existing cases against India, and also promises not to pursue legal costs for fighting law cases. Notably, India was locked in a long battle with the two corporations over tax claims against them based on the retrospective taxation provision. Only recently, a court case in France was awarded in favor of Cairn to attach all Indian government-owned assets in the French jurisdiction as compensation for the companies against Indian tax claims and the costs for the legal disputes in connection with these cases. All these cases were proving to be an embarrassment for the country and acted as a disincentive for foreign direct investors.

Retrospective taxation was introduced by the then Finance Minister Pranab Mukherjee in his last budget in 2012. And, since it has been felt that overseas companies were making huge capital gains on Indian assets as overseas investors holding these assets sold these to others. This essentially means that if as an overseas investor one has been owning assets within India and if he/she made an offshore deal for the sale of the same, the capital gains for the seller were subject to Indian taxation. This was despite the fact that the transaction was held on foreign soil with other tax jurisdictions. It is observed that any retrospective tax claims are controversial as it introduces an element of uncertainty in investor relationships with host countries. Having said this, the host country that is levying these taxes also plays an important role. Any corporation in its senses, would not dare challenge the same if it were being slapped by economically strong countries like China or the USA.

For instance, one of the largest car makers in the world, Volkswagen is virtually held hostage to China and its outlandish demands. This being because 40 percent of the market for its products is in China. On the other hand, Google has been known to be formulating artificial intelligence tools for face recognition and similar aids, used for identifying Uighur Muslims or other dissidents in China in the past. Though the amendment in retrospective taxation is being seen as a good move, as it embarrassed the country and exposed its vulnerabilities. Yet, its withdrawal also exposes India’s weakness to rein in multinational corporations. Economically strong nations have the power to superimpose their taxation rules which the corporations have to comply with even if they do not want to! The loss of losing a great economic market is what makes them vulnerable, just like in the case of Volkswagen. When we talk of economic superiority, India is well behind China and this probably is the reason why superior economies go through with their rigid taxation systems and we can’t.

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