Dear Pranabda, Save India’s Honour & Withdraw GAAR & Vodafone Law

Shri. Bibek Debroy

Dear Pranabda, Save India’s Honour & Withdraw GAAR & Vodafone Law

Editorial Staff

Noted economist Bibek Debroy argues that GAAR and the Vodafone retrospective amendments send a “perverse signal” and are a “terrible” idea. He says the proposals create great uncertainty, subjectivity and non-transparency which does not auger well for India as an investment destination. He urges the Finance Minister to admit his mistake and do a honourable strategic retreat before it is too late

Close on the heels of eminent senior advocate Harish Salve‘s passionate attack on the Vodafone retrospective amendments and General Anti-Avoidance Rules (GAAR), noted economist Bibek Debroy has also torn into the Government’s proposal to nullify the Vodafone verdict and implement GAAR.

In a short but succinct article, Bibek Debroy gives persuasive reasons for his suggestion. With regard to GAAR, Debroy points out that the time is not opportune for GAAR. There is already a severe dent in investor confidence owing to the state of the economy and the adverse balance of payments and GAAR will create great uncertainty, subjectivity and non-transparency.

.. by ramming GAAR through the Finance Bill, 2012, the Government has given it the impression of being an “anti-Vodafone” and “revenue-generation” measure, designed to hit out at cross-border transactions. The panic and anxiety that has gripped FIIs and foreign investors, could have been avoided if it had been brought in through the DTA, as originally intended

Debroy argues that if GAAR was proposed to be implemented only through the Direct Tax Code (DTC) as originally intended, there was no justification for it being “slunk in” through the Finance Bill 2012. He points out that GAAR would have an air of legitimacy about it if it was brought in as part of a scheme to revamp the entire income-tax law and if it was passed by Parliament after a thorough discussion.

He opines that if GAAR had been brought in through the DTC, there would have been no controversy of the type seen today because tax-payers would have felt confident that there were adequate safeguards and dispute resolution channels. However, by ramming it through the Finance Bill, 2012, the Government has given it the impression of being an “anti-Vodafone” and “revenue-generation” measure, designed to hit out at cross-border transactions. The panic and anxiety that has gripped FIIs and foreign investors, could have been avoided, says Debroy.

Debroy also criticizes the soothing sounds made by the top brass of the Finance Ministry that they will “talk” to the foreign investors and “reassure” them. He says that instead of such half-measures, the Government must focus of ensuring that the rules and regulations are clear and that there is no ambiguity that requires “talking” for “reassurance”.

GAAR should not just be deferred; it should be shelved till it is properly debated and integrated into DTC, says Debroy firmly.

The Vodafone amendments send a “perverse signal” .. the FM and his ministry should acknowledge the mistake and scrap GAAR, until it is done through DTC .. There are times when a government should say “mea culpa” and roll back provisions in a Finance Bill. There is honour, rather than dishonour, in strategic retreat”

On Vodafone, Bibek Debroy tears into the Government calling the proposed retrospective amendments a “perverse signal” conveyed to the international community of disrespect to international tax treaties. Debroy reminds the Government that strategic tax planning and tax avoidance are undertaken by businessmen on basis of tax laws prevalent at a certain point and says that to supercede these laws by retrospective amendments is a terrible idea. He expresses surprise that despite the overwhelming opposition to the proposals, the government and the Finance Minister haven’t toned down their “strident tones” on the issue.

Debroy urges the government to think beyond its immediate problems of spiraling deficit, inefficient public expenditure, soaring subsidies and the paralysis in decision making. GAAR and the Vodafone retrospective amendments will not rectifiy the situation but will only exacerbate the problems, he warns.

Debroy pleads with the Finance Ministry to “acknowledge its mistake” and scrap GAAR and the Vodafone retrospective amendments. He adds that there are times when a government should say “mea culpa” and roll back provisions in a Finance Bill and that there is honour, rather than dishonour, in strategic retreat.

15 comments on “Dear Pranabda, Save India’s Honour & Withdraw GAAR & Vodafone Law
  1. Amit Jain says:

    Does the government has guts to go after Hutch and recover the tax who has actually benefited out of transaction. Vodafone has actually purchased the share and did not withhold the taxes on the basis of interpretation of law which was even accepted by the Supreme court of India. Basically by doing retrospective amendment to law Government is trying to make Vodafone as assesse in default and penalise them. It is set rule of law that a person can not be punished for a offence which was not an offence when the same was committed and same become the offence at a later date due to change in law. Any one who should be target in this whole thing is hutch who actually made money in India. When finance minister says we can not allow foreign player who has made money in India and not paying taxes in India then it shall be Hutch who should not be allowed to go without paying taxes and not vodafone who has actually acquired Indian business.

  2. I agree that retrospective amendment should be made to the law to avoid tax leakage.. Its OK… But at same time make retrospective amendments to such issue where the assesses are harassed in name of law, return hard earned money of the Sincere citizen which has been wasted like anything by this corrupt Politicians and bureaucrats of our country. In my opinion its better and diplomatic approach not to tax Vodafone so that we continue to have tax & Investment friendly status in eyes of world , rather than collecting the tax from Vodafone and wasting the funds in name of development of country. In Nutshell we should first assure that the tax collect would be spent in best interest of this country or no point in collecting the tax from Vodafone for augmenting Swiss bank balance of corrupt politicians.

  3. CA Prachi Parekh says:

    So much has been said about Vodafone, GAAR and all the volatile issues raised by the Finance Bill 2012. My views would be echoes of all the sentiments mentioned above, but nonetheless. The only thing which is disturbing is, when the highest judicial authority in the country interprets the law in a certain way, that view should be respected. The judgment should be considered as an eye-opener by the Law Making authorities, for tackling the lapses in the law. It should not be disrespected with bringing in retrospective amendments.
    I still feel, that they have reacted….reviewing laws and upgrading them should be a proactive activity,to be done with discipline, periodically. Not after facing defeat, and then being vindictive. The Law Commission which is set-up, to review various laws, should get active, and review them.

    GAAR, is a hurried step introduced by the Finance Bill, i would say. The way it has been introduced and then deferred for a year, gives one a feeling, that there was some lack of homework on the part of the Government in bringing it in. It is full of ambiguity giving too much authority to the officials to determine its implementation.
    The guidelines should have been in place, and notified at the time the proposals were introduced.

    Anyways, the issue is, is there anything more that we can do, other than voicing our strong views / criticizing the law makers? If yes, what it is??

  4. vswami says:

    The subject topic has come to generate lot of heat and unprecedentedly many contradicting views from every quarter, well informed or otherwise.
    Be that as it should, for a change, one may turn to the tribunal case, PIRAMAL HEALTHCARE LTD. v.ACIT [2012] (Mumbai). Prima facie, the proposition taken up whether at all, – A payee can’t be treated as an assessee-in-default for not deducting the tax at source is, by any standard, a non-issue.

    Need to ponder :
    ‘Manmade law’ has come to be growingly given a new meaning. Can anyone, any longer, dare say, with even an iota of conviction, that it is the legislature which has been entrusted with the onerous constitutional duty to make law? Should the lowly AO be at liberty, bent upon engaging himself all the time freely in the pastime, keep on re-writing even what law clearly and unequivocally spells out!
    Playing by the rules was an old belief; but modern day precept is, – to play besides / sans the rules. That, it appears, is the tall order given to, or evidently assumed by, the ones du-tied to simply implement clear mandates of law !
    Do not the lamentations recently echoed by eminent experts, though in a different context, deserve being given by everyone, especially taxpayers, a impeccable and unbiased serious thought and insightful deliberation?

  5. question says:

    Dear >>>>
    Isn’t Vodafone paid few Millions to the party fund of ????
    That’s why the situation comes,

  6. Harish Bhatia Advocate says:

    First of all, WE should decide, Can we live without FIIs. Perhaps NOT , Even for shortest time, if FIIs turn back, our economy starts crumbling and the FM has sleepless nights, RBI wide open its eyes and mouth and is helpless, the more it cures the economy the more it worsens. WE should make ourselves independents and first of all Indian should pay right amount of taxes by declaring correct income and build the Nation strong, then only we can be able to live peacefully, otherwise the MNC will keep taking advantage of the lacunae of the law of the land. We are living in the country where the bogus income tax takes place and we keep watching. WHY the Indian not pay the taxes. Many professional , who are known to the taxmen twist the law and share the booty between themselves, each tax jurisdiction has its premium rate and is paid for getting that post. Whither lies the loyalty towards the nations, we have a least care for the country. Self prosperity is the the only motto at any cost. THE TRUTH IS THAT : THE CORRUPTION SUITS THE PROFESSIONALS and if corruption is uprooted many of professional will become jobless any majority of taxmen will get their faces withered. WE have to set right our house first and widen the horizons of thinking.

  7. Ulhas Kini says:

    The change in law with retrospective amendment arises when there is ambiguity in provisions of law which needs clarification and not to make substantive change in the law. The retrospective amendment to reverse the decision of Apex Court in case of Vodafone is substantive change of law. It is nothing but a type of extortion by the democratically elected govt. which needs to be condemned.

  8. Manish Seth says:

    This is not about whether foreign investments / companies should be taxed or not. This is about regime having respect for the law of the land as it stands today. If Supreme Court has judged that as per the provisions of the law as it stands today, Vodafone was not liable to pay tax, then the view deserves some respect, all the more from the Government. Overturning a judgement by bringing retrospective amendment is shameful to say the least.

    Go ahead! make laws which leave no doubt regarding taxability of future deals. Only those who fail to appreciate the circumstances businesses operate in can support retrospective amendments. At a stroke of a pen, Government can destroy businesses [from back date]. Retrospective amendments should be banned. Or maybe this is our Government’s way of promoting investment – Come invest, but don’t count on law, I can always come back and change it – Retrospectively.

  9. CA S K Somani says:

    The whole responses drive us upon more questions where there is no answers but which needs to be looked at them with a neutral eyes :
    a) Whether India is sovereign country of the whole global system? Can it protect its monetary policy ? (in power pressure or in the interest of its own country )
    b) IS it free to put on any missing link at any point of time (when found and plug the loose ends)?
    c) What will happen to the Tax regime when Indian stocks and securities will be sold or bought in the overseas stock exchanges? How you will tax the STCG or LTCG on the same in DTAA?.
    d) What will be its precedence in the economy as a whole and Tax regime in particular in the next years to came or a new finance minister or a new government will came ? Will it sustain all along?
    e) After all, is it money or the transactions you want to catch either a cat or mice, will this make the intent of the law maker to be honest to the people of India ?
    f) With these decisions, will Govt proved to be autocratic and push Indian Judiciary down? Are we moving to another
    economic and monetary emergency once again?

    Now it is up to The People of India to think it over and decide their future ..
    Let us see what happens to India in those coming years ………

  10. Kishor Satwick says:

    Let us stop arguing Vodafone retro amendment and GAAR. Just to introspect, our attitude allowed the foreign rulers to plunder the wealth. Now the so-called MNCs under the garb of globalisation and our myopic vision to allow us to be robbed by the MNCs under the guise of attracting investment are ruing us further.

    Even the Supreme Court in para 88 has categorically observed that “The High Court has failed to appreciate that the payment of US$ 11.08 bn was for purchase of the entire investment made by HTIL in India. The payment was for the entire package.” If the payment is towards the entire investment in India, the seller, in this case HTIL, wherever the company may be having its office on this planet earth, it cannot escape the tax liability when the tax liability, in the light of this observation is essentially and necessarily arising out of the business assets/investment in India. The issue is not whether Vodafone has to deduct tax. The issue is who is liable to pay tax? We cannot allow the MNCs to go scot free without payment of their due tax liability.

    GOI is fully justified with this retro amendment. Secondly, many documents are in the open establishing that the GOI had cautioned Vodafone on the need to calculate tax liability on their deal. They cannot portray themselves as victim. In fact, GOI and people of India are the victims of such dubious cobweb of holding and subsidiary companies. A time has come to deliver a strong message that MNCs cannot take the GOI and the Indians for granted. Lastly, if the UK government can introduce retro amendments in their tax laws and when even China can introduce such amendments in their tax laws, why everyone is crying hoarse in the instant case? FDI is not at all dependant on the retro amendment. It is also driven by various other factors. Otherwise China could not have attracted huge FDI compared to India. It is high time Indian Intellectuals stopped persecuting the GOI.

  11. CA Manoj Solanki says:

    The author claims that the retrospective amendment in the context of Vodafone would convey a “perverse signal” to the international community of disrespect to international tax treaties. The respected author should appreciate the fact that in the case of Vodafone, the transaction was routed through Cayman Islands with whom India does not have any tax treaty and so there is no question of disrespecting any international tax treaty. The concerns raised by the author have been appropriately addressed by the Hon FM in his speech in the Parliament during the discussion on Finance Bill.

    More than the amendments, biased articles written by vested interests are the real reason for the negative perception being created about India…..

  12. Sarosh Irani says:

    I completely agree with Jaymin Vyas’s view. Foreign companies are driven with the urge to make profits. Not paying taxes should never be a means given to these foreign companies to come and make money in India. Is it right that Indian companies pay taxes in India and abroad but we lay a red carpet and welcome foreign companies to enter into India, make money in India and as a thank you refuse to tax them on the capital gains earned in the transaction.

    Stop being narrow minded and try to keep talking about your views, its time we stood up for the NATION and the INTEREST OF THE NATION. Sorry sir, you may be a good economist but think of the fact, VODAFONE BOUGHT HUTCH INDIA, and if that be the case then they have to pay taxes. Further the Income tax Department warned both Hutch and Vodafone of the tax obligations. Let us give credit to the Government Officials where it is due. They are doing their job for our beautiful country, its time we the citizens of India, compliment them rather than go on giving our advice without knowing everything.

    I may not know all the facts, just like you, but I trust the wisdom of our Honourable Finance Minister and the entire Finance Ministry and each and every individual who has worked on this case. I think its time we SHUT UP and respect them for taking a TOUGH STAND in the INTEREST OF THE COUNTRY.

    Suprising that we state that the Government should set its house in order and then talk about foreign companies paying rightful taxes. Then in this case, EVERY CITIZEN OF THE COUNTRY SHOULD ALSO NOT PAY TAXES TILL HE IS SATISFIED THAT THE GOVERNMENT IS SPENDING THE TAX PAID BY HIM JUDICIOUSLY. Is a foreign company so special to us that we will look down upon ourselves and that is reason enough for them not pay taxes which are rightfully payable by them. LETS NOT MIX ISSUES. THE FINANCE MINISTER IS CORRECT AND HIS STAND IS RESPECTED BY ME and I am of the opinion that every Indian should be proud of his bold stand.

  13. sarvesh srivastava says:

    Agree fully with Debroy. The retrospective amendments when the Govt is unable to stand on its feet is a very poor idea. It smells of a conspiracy to me and much as we may want to glorify the wily politician this move shows his hand fully.

  14. well said but now it seems it is too late in the day. after all huge stakes are involved and no one will let go amounts as huge as 40000 crores out of vodafone and like transactions. the entire set of bill amendments are made to thwart businesses and business activity. raising monies would be an issue now. investments routing will be a challenge. mergers and acqusitions would slow dow. cross border transactions would suffer. the effect will come in just one year. i wish that some sense will prevail and gaar is lifted. in fact there is no purpose in keeping it in the Act for now if it is deferred.

  15. Jaymin Vyas says:

    I am not much sure on GAAR, but i think the retrospective amendment brought to tax Vodafone deal is pretty much justified. How can you even justify that it sends out wrong signals if the amendment is brought in? Why dont you see the wrong signals that we give out, if we do not tax this mischievously colored transaction?

    If not taxing foreign investors is your prime concern, then why even have any sort of tax laws to tax them? Remove all sorts of taxes on Business/CG/etc of the foreign entities altogether! This will attract even more foreign investment. Your purpose is achieved!

    In fact, I would recommend to remove the Foreign companies related requirements from the Companies Act & the other related laws as well. The more reporting & regulatory relaxations you give to the foreign investment in India, the more they will be attracted to invest here. Remove the Chapter XI of the Companies Act altogether!

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