Since it took office, the NDA government has been trying to woo investors by, among other things, promising that there will not be any “tax terrorism”. It has been consistent in its stand that it will not resort to fresh retrospective taxation, even though it is a “sovereign right” of the government. Yet legacy issues remain. The latest notice against Cairn Energy for Rs 29,000 crore this week, and the one against Vodafone, for Rs 14,200 crore, sent in February, essentially show how difficult it can be to bury the ghost of retrospective taxation.
In his budget speech, Finance Minister Arun Jaitley said that he had hoped “the cases pending in various courts and other legal fora relating to certain retrospective amendments undertaken to the Income Tax Act, 1961, through the Finance Act, 2012, will soon reach their logical conclusion”. Since that is taking time, Jaitley proposed a one-time scheme of dispute resolution for all past cases that are ongoing under the retrospective amendment, thus providing an opportunity to rid the investor climate of a dreaded spectre. According to this proposal, companies can settle the case by paying only the tax arrears and get a waiver of both interest and penalty, subject to their agreeing to withdraw from all arbitration with the government. In the case of Cairn Energy, for instance, Rs 10,200 crore is the original tax liability, while the remaining liability of Rs 18,800 crore is on account of interest and penalty. But the budget proposal has still not taken formal shape. And in the meantime, notices continue to be sent as a routine exercise.
Where does this leave investors, especially global investors, many of whom see India as an attractive opportunity, given the slump across economies? Ideally, investors should be enthused by the certainty of the tax regime — an absolute essential for all businesses — promised by the NDA government. However, such notices do not reflect well on the government’s bid to put to rest all doubts among investors. It is now incumbent on it to bring all the existing cases to a quick closure.