Bring in the Foreign Investor – Drop the Retrospective Tax

It took the rupee to have a lowest ever fall for the Government to understand that the decision of retrospective amendments to tax was a big blow to the Indian economy. The foreign investor had lost trust in India after seeing the regulatory barriers and was reluctant to do business in India.

There are 16 direct tax amendments in the Finance Act with retrospective effect, some of them coming into effect from as far back as 1976. These amendments are aimed at overriding the judicial pronouncements and undermining the judicial process in at least the taxation matters. Previously, the Shome Committee[1] set up to analyse the amendments in Finance Act, 2012 came up with the recommendation to do away with the retrospective amendment in order to  bring in certainty in taxation of indirect transfers and to restore the much needed confidence of the foreign investor in the Indian tax regime.

Finally, the Government appointed a panel, which was headed by Ex-SEBI chairman M Damodaran in order to take steps for making India viable for business. Currently, India stands 132nd among 185 countries in the World Bank™s Doing Business Report.

The committee report [2] to the Ministry of Corporate Affairs suggested, “Retrospective taxation has the undesirable effect of creating major uncertainties in the business environment and constituting a significant disincentive for persons wishing to do business in India… This is a major area where improvements should be attempted sooner rather than later since businesses cannot take corrective action retrospectively.”

The committee further opined that the practice of retrospective tax amendment has faced severe criticism after the centre used it as a tool to overturn the Supreme Court ruling in the Rs 13,000 Crore Vodafone dispute.

There were a majority of the recommendations aiming to improve the regulatory set-up, including review of law, with specific recommendations for small and medium enterprises (SMEs) and changes in the way the tax department does business. The Committee observed that there have been improvements in paying taxes and filing returns but tax payers still have to contend with officials, who often take an adversarial stance.

“In an attempt to increase the annual collection of taxes, assessing authorities do not take cognizance of rulings by higher authorities in matters where the facts in issue and the principles of law are identical. This has the further drawback of crowding the system with matters, which should have been decided at the level of the assessing authority,” the committee said.

The panel has also supported the consent mechanism for matters of low significance to deal with a large volume of matters of systemically unimportant issues. For enterprises, the panel has said there are contradicting rules and regulations that are put out by government agencies and regulatory bodies that need to be reviewed.

It is hoped that the Government would not turn a blind eye to the Damodaran Committe Report and make serious efforts to rope in the foreign investors once again to revive the Indian Economy.

Further Reading:

Damodran Commitee Report

The Vodafone Judgement (Supreme Court)

Draft Report on Retrospective Amendments Relating to Indirect Transfers

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