Removal of retro tax will send positive signal to foreign investors: Business Standard 5th August 2021

 

This change in retro tax law will reflect well on the govt's efforts to improve the ease of doing business environment

The removal of retrospective taxation for deals reckoned prior to 2012 is a very progressive step taken by the government. This, ostensibly, comes on the back of the litigation that is on in the International Arbitration Tribunal relating to Cairn Energy. But this has been a legacy issue with successive Indian governments where retrospective taxation was an effective way of garnering revenue. The indication given by the government alongside is that there could be refunds given to the companies without interest.

Retrospective actions are always retrogressive, and this is a correction required in the Indian tax system. While Cairn and Vodafone are lingering issues involving large amounts of money of around Rs 20,000 crore-Rs 30,000 crore put together. The fact that the Cairn deal was in 2006 just reveals how anachronistic are these laws. In case of Vodafone, the Supreme Court had also ruled in favour of the company, but the retro rule, pushed it back. Withdrawing such a measure is a good signal for companies looking to invest in India. Around a dozen companies have been impacted by such measures. This is a big regulatory risk that the players face when investing in any country where laws change. This cannot be avoided but making them effective retrospectively is never a good idea even though it does look tempting for governments.

India has been trying to reach out to foreign investors by providing a better enabling environment to do business. The recent discussion on IBC is also timely as that has also been a sticky issue with investors. Tax laws are probably even more important as they affect companies directly. Companies always run the risk of tax laws changing in any domain, and that is acceptable. However, making any new tax law effective from an earlier date is not acceptable as the regulatory cost increases and sends a wrong signal.

From the point of view of the government it can be argued that there is a potential loss of income. However, often such cases can go into litigation as has been the Cairn case, where the cost in terms of time and money also increases besides sending conflicting signals. Such amounts are not normally buffered in the Budgets on account of the time taken to recover the amount even when imposed. Therefore, such a law will be fiscally neutral and would have a positive impact only when it is received.

This should also give the government an idea to also follow the same path whenever tax exemptions are withdrawn, or rules changed for any savings instruments in the domestic economy. It may be recollected that when equity capital gains were introduced there was grandfathering introduced. However, when the debt mutual funds were to be taxed on capital gains for a period of 3 years rather than 1 year, it was done retrospectively. Therefore, it is essential to ensure this also holds in the domestic context so that domestic investment is also sure.

One of the guiding principles of investment is certainty in environment. This is provided by a regulatory structure at the time of investing. Changing laws during the course of time may be inescapable. However, when it comes to taxation doing so with retro effect sends wrong signals and it is good that the government has withdrawn this rule. This change in retro tax law will reflect well on the government’s efforts to improve the ease of doing business environment for sure.