The government’s decision not to appeal against the adverse verdict of the Bombay High Court in its Rs.3,200-crore tax case against Vodafone is the first concrete demonstration of its resolve to do away with what Prime Minister Narendra Modi and Finance Minister Arun Jaitley termed “adversarial” taxation policies of the erstwhile UPA government. Though the BJP had during its election campaign, referred to “tax terrorism” in its election campaign there was little that happened in the first eight months of the new government to show that such policies would be reversed. The latest Cabinet decision sends out a strong signal to foreign investors that this government will be fair in its tax policies and avoid needless litigation. The decision not to appeal has implications for other such similar cases involving multinationals and is, in that sense, a significant one. It is also an acknowledgment that the Income Tax Department’s assessment of the case was erroneous. The Vodafone case was about wrong classification of a capital receipt as taxable income at the hands of the company. Applying transfer-pricing guidelines, the I.T. Department held that Vodafone had underpriced its shares issued to the parent. So it revalued the shares and deemed the difference to be a loan given to the parent. This was clearly high-handed and a wrong application of transfer-pricing regulations.
The government’s decision to accept the High Court verdict is also a signal to assessing officers that they should refrain from making unreasonable tax demands, relying on aggressive and faulty interpretations of rules and sections. Yet, it is also true that the government turns the heat on these officers when it decides that tax collections need to be augmented. If the tax official is confused he cannot be blamed. What is needed is a stable policy that sends out the signal to both assessing officers and taxpayers that the government will crack down on evasion but within the framework of the law; there will be no extraordinary interpretations of rules and sections even in times of revenue distress. The focus will now shift to whether the government moves to neutralise the mischief caused by the retrospective tax amendment; this is a major demand of foreign investors who were disappointed that it was not addressed in the first budget of this government in July last year. The General Anti Avoidance Rules, or GAAR, are a cause for worry for taxpayers and foreign investors as they confer wide discretionary powers on the I.T. Department. It will be interesting to see if Mr. Jaitley makes a Budget announcement to postpone its implementation once again as per the recommendations of the Parthasarathi Shome Committee.
