Vodafone dispute must be resolved,but a wider strategy to revive investor confidence is needed
The change of stance by the new law minister and the attorney general on the Vodafone tax dispute is an attempt to address the problems created by the amendment to the tax code introduced last year. After claiming that there is no legal provision allowing conciliation between the tax authorities and Vodafone,the attorney general has issued a new opinion that allows non-binding conciliation in this case. The intent may be good,but questions remain about whether this step will reduce tax uncertainty for other foreign investors.
It is not clear that the ministry of finance can reduce the tax that has been calculated and applied based on a law made by Parliament. The ministry has assured that any change in tax collected from Vodafone will only be implemented with the approval of Parliament. In the circumstances,the right thing to do would be to first withdraw the 2012 amendment by passing another amendment that nullifies it. The government can then embark on a more well-thought strategy for dealing with tax avoidance.
After the Supreme Court held that the provisions of the Income Tax Act do not allow authorities to collect taxes from Vodafone on the acquisition,the government had introduced two changes to the law. First,it introduced General Anti-Avoidance Rules (GAAR) to give more powers to the tax authorities. Second,it made a retrospective amendment to the IT Act to undo the SC judgment and make Vodafone liable for taxes. These changes do not affect Vodafone alone. They have reduced the certainty of tax liability in the country and undermined investor confidence. Under the new ministry of finance team,the consequences of the amendments seem to have been postponed. A committee was constituted to study the implications of GAAR: it recommended a delay in enforcing the laws and the government postponed GAAR. Now,to assuage investors concerns,the government is trying to find a solution to the Vodafone issue through conciliation for one case. But would others,facing similar cases,also get the right to settle out of court? Would they demand equal treatment as a right and ask for such a settlement,and go to court over the question? These questions need to be addressed. Under no circumstances should an exception be made only for one case.