Japan has asked the Narendra Modi-led government to drop a $3-billion retrospective tax bill raised on Japanese companies operating in India, calling those “unreasonable” and “discriminatory”. It has said the demand could impact future Japanese investments in to India. Tokyo is hoping for relief in Union budget that finance minister Arun Jaitley will present in Parliament in July first week.
The tax demands include a massive $2-billion bill on Mitsubishi and an about $600-million bill on Honda. “Some of the Indian subsidiaries of the Japanese companies, such as Honda and Mitsubishi, are facing unreasonably huge tax demands”, notes a document prepared by Japan and sent to the Indian ministries of finance and commerce.
Tamaki Tsukada, minister, economic section, at the embassy of Japan, told the Indian Express that “these (tax demands) have created a lot of irritation and affected the interest of Japanese companies to invest in India”.
The concerns were raised by Japanese Prime Minister Shinzo Abe at the summit meeting with Prime Minister Manmohan Singh earlier this year. But despite a joint statement to create “predictability and transparency in terms of business environment, including tax administration”, the issue was left unresolved by the UPA government, Tsukada said.
While the tax demand on Honda under Section 40(a) (i) of the Income Tax Act is large, the demand on Mitsubishi at $2 billion (as big as the one on Vodafone) has been hotly contested by Japan.
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The demand, as Tsukada explained, stretches over almost a decade of Mitsubishi’s operations in India. Under the section, payment made towards the purchase of goods by Indian buyers from overseas suppliers is subject to withholding tax. The problem, he said, is that when these companies set up shop in India, the tax provisions did not exist and so it was unfair to apply them now.
The Japanese government has also contested that the section violates the India-Japan Tax Treaty. It hopes the tax demands will be rescinded since its companies are in the manufacturing sector, and India wants to expand the sector through bilateral cooperation with many of these companies from Japan. The demand “amounts to a discrimination prohibited under Article 24(3) of the India Japan Tax Treaty to disallow payments for goods purchased by the Indian subsidiaries from a non-resident”. It goes on to add that “such a situation has a significantly adverse impact on their business in India”.
The tax issue will also be flagged in the Japan India chamber of commerce memorandum to be submitted to Jaitley in June. Japan’s ambassador to India, Takeshi Yagi, who has requested for an appointment to meet the finance minister, is also expected to mention the demand.
Indian tax rules are being repeatedly challenged by multi-national companies, of late. Japan joins the list of countries that already have substantially big tax disputes with India.
Speaking at the Indian Express-organised Idea Exchange recently, law minister Ravishankar Prasad said he was against the application of retrospective tax laws except in rare cases, though the government should retain the power to use it. A former revenue secretary said the rise in demands stem from the acute pressure on the tax departments to meet the budget targets for reduction of the revenue deficit set by the government in the past few years.
“Unless the deficit numbers are rationalised, it is difficult to see how these tax demands can be withdrawn,” he said.