The gyrations around the tax demand on Vodafone is bringing home to the tax department the perils of playing around with rules. The retrospective amendments to the Income Tax Act Section 9 (1) which had seemed such a winner for the government in 2012 is now proving so awfully difficult to untangle. To promote India as an attractive investment destination does not sit well with such tax measures as the officials in the ministry have learned in their global road shows.
Yet having inserted such sweeping powers in a tax regimen that ranks 152nd globally in terms of ease of paying taxes (Doing Business Report,World Bank) erasing them is proving fiendish. The latest suggestion is the government will need to amend the Arbitration and Conciliation Act,1996,too in addition to the Income Tax Act,1961,to achieve it. The former needs changes as it provides for only commercial disputes which in India does not mean tax disputes.
However,tax experts offer a simpler route. They say the government can deploy the suggestions made by the Shome panel on these retrospective amendments. Shome has suggested three things such amendments should be prospective if at all implemented,the government should ask Hutch instead of Vodafone as the party liable to pay tax in India and thirdly,if both these options dont work out,the government should waive interest and penalty in case of implementation of the amendments.
Tax experts have also made the sensible suggestion that the Income Tax Act includes Section 273A where the commissioner is empowered to waive the interest and penalty of an entity. Should the government choose to clarify the issue,it can simply issue circulars clarifying the same.
However,permission for such executive action in the current political scenario appears difficult; instead the finance ministry will most likely ask Parliament to ratify Vodafone solution.
Meanwhile,as the section has been used to charge other companies too the stakes have gone up further.
Shruti is a senior correspondent based in New Delhi