Opinion The right call

The Narendra Modi-led government would do well to heed Attorney General of India Mukul Rohatgi’s advice not to contest a Bombay High Court order favouring Vodafone in a transfer pricing-related tax dispute. The revenue department had raised a tax demand of around Rs 3,200 crore on Vodafone India for having allegedly under-priced shares issued to its Mauritius-based holding company in 2009-10. The department claimed that the difference between the fair “arm’s length” price for the shares and the price at which they were issued represented “income” liable to be taxed. The high court, rightly, rejected this argument. How could a transaction be taxed when no income had actually been generated? In this case, Vodafone India had merely made a primary issuance of shares. It is only the capital gains resulting from a subsequent sale of shares — assuming the Mauritius parent had, indeed, received at a steep discount —  that could have been subjected to tax.

The transfer pricing dispute is different from the one relating to Vodafone’s acquisition of Hutchison Essar’s telecom business in India. The latter deal in 2007 did result in a real transfer of assets and capital gains. While this should ordinarily have been taxed, the problem was that the deal was structured in a manner wherein the acquirer, seller and the company being bought were all incorporated overseas. What took place, then, was an offshore transaction involving only shares, which weren’t taxable under the Income Tax (IT) law at that point. One could, therefore, have argued that the revenue department had some case, even though the then UPA regime’s move to retrospectively amend the IT Act to tax Vodafone-Hutch type transactions was utterly ill-judged. But in the transfer pricing case, the department does not have even the remotest justification for going after Vodafone. The high court’s ruling, that only income that is real and not notional ought to be taxed, should not be challenged.

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If the present government follows Rohatgi’s opinion, it would partly correct for the excesses during its predecessor’s tenure. The damage to investor sentiment from the overzealousness of revenue authorities — leading to frivolous tax claims extending even to incomes not received, but deemed to have arisen — is all too well known. In a scenario where the economy is crying for investment, India needs to send out a clear message that it is a country where doing business isn’t an uncertain proposition — at least from a taxation standpoint.