FM P. Chidambaram Promises To Review Vodafone Retrospective Law & GAAR

The Finance Ministry has issued the following Press Release dated 06.08.2012 in which it was stated that with a view to ensuring “Clarity in tax laws, a stable tax regime, a non-adversarial tax administration” etc, “corrective measures would be taken to reassure investors“. It was specifically stated that there had been “directed a review of tax provisions that have a retrospective effect in order to find fair and reasonable solutions to pending as well as likely disputes between the Tax Departments and the Assessees concerned“.

Finance Minister Confident of Bringing Economy Back on Desired Track; Gives an Overview of Map for Recovery

The Union Finance Minister, Shri P. Chidambaram has said that uppermost in his mind is the duty to re-gain the confidence of all stakeholders. Assuring that inflation can be moderated in the medium term, he said that the Government will work with RBI in this regard. In a statement, the Finance Minister said that a path of financial consolidation will be unveiled shortly. He made it clear that the burden of fiscal correction must be shared, fairly and equitably, by different classes of stakeholders. The Finance Minister said that the poor must be protected and others must bear their fair share of the burden. He further said that wherever required, the corrective measures will be taken in bringing clarity in tax laws, to have a stable tax regime, a non-adversarial tax administration and a fair mechanism for dispute resolution.

Following is the full text of the Finance Minister’s statement:-

“I assumed the office of Finance Minister on Wednesday, August 1, 2012. It is a position of great honour, it is also a position of great responsibility.

In the last few days, I have been briefed by senior officials of the Ministry of Finance on the state of the economy. It is true that the economy is challenged by a number of factors, but it is also true that with sound policies, good governance and effective implementation, we would be able to overcome these challenges.

Uppermost in my mind is the duty to re-gain the confidence of all stakeholders. Obviously, where necessary, our policies have to be modified or fine-tuned in order to meet the expectations of different stakeholders.

We intend to unveil, shortly, a path of fiscal consolidation. I would like to make it clear that the burden of fiscal correction must be shared, fairly and equitably, by different classes of stakeholders. The poor must be protected and others must bear their fair share of the burden. Obviously, adjustments must be made both on the revenue side and on the expenditure side. We have asked Dr. Vijay Kelkar, Dr. Indira Rajaraman and Dr. Sanjiv Misra to assist the Government in formulating the path of fiscal consolidation and we expect that the work will be completed in a few weeks.

Price stability is an important objective. In fact, it is more important for the poor. There has been pressure on prices, and inflation – especially food inflation – is high. The causes are well known: some are beyond our control, such as prices of crude oil and imported commodities, but some others can be addressed by determined action. We will take steps to remove the constraints on the supply side. We will also use our stocks of foodgrain to moderate prices. Where necessary, we will enhance the import of items in short supply.

Non-food inflation is already declining. We are confident that inflation can be moderated in the medium term. Fiscal policy and monetary policy must point to the same direction and must move in tandem. Government will work with the Reserve Bank of India to ensure that inflation is moderated in the medium term.

We are conscious that current interest rates are high. High interest rates inhibit the investor and are a burden on every class of borrowers, be it a manufacturer of goods or a purchaser of a home or a two wheeler or a student who takes an education loan. Sometimes it is necessary to take carefully calibrated risks in order to stimulate investment and to ease the burden on consumers. We will take appropriate steps in this regard.

The key to restart the growth engine is to attract more investment, both from domestic investors and foreign investors. Since investment is an act of faith, we must remove any apprehension or distrust in the minds of investors. We will improve communication of our policies to potential investors. The aim will be to remove the perceived difficulties in “doing business in India”, including fears about undue regulatory burden or regulatory over-reach. Indian companies, especially public sector enterprises, which have large cash balances will be encouraged to restart investment. Proposals pending with the Foreign Investment Promotion Board will be processed and decisions taken expeditiously.

Clarity in tax laws, a stable tax regime, a non-adversarial tax administration, a fair mechanism for dispute resolution, and an independent judiciary will provide great assurance to investors. We will take corrective measures wherever necessary. We have recently appointed two Committees, one to examine GAAR legal provisions and guidelines and the other to review taxation of the IT sector and Development Centres. I have also directed a review of tax provisions that have a retrospective effect in order to find fair and reasonable solutions to pending as well as likely disputes between the Tax Departments and the Assessees concerned. With these measures, and some other measures that we hope to take in the short term, it is our intention to raise the level of investment to 38% of the GDP that was achieved in 2007-08.

I believe that, around the world, there is enormous goodwill for India and most people continue to keep faith with the India growth story. It is natural that they look closely at certain economic indicators, one of them being the exchange rate. Volatility of the exchange rate has reduced in recent weeks. A reassurance on the investment climate, continued inflow of remittances, and a rise in capital flows – both FDI and FII – will bring further stability to the exchange rate. We intend to fine tune policies and procedures that will facilitate capital flows into India.

A high level of savings is a pre-condition to a high level of investment. In 2007-08, savings touched 36% of GDP. It is now down to 32% of GDP. One of the reasons may be a perceived lack of attractive investment opportunities and instruments. Hence the attraction of gold, but gold is not a productive asset and the demand for gold worsens the current account deficit. Both the mutual fund industry and the insurance sector have turned sluggish. In the next few weeks, we will announce a number of decisions to attract more people to invest in mutual funds, insurance policies and other well-designed instruments.

Manufacturing and exports are two key drivers of the economy. Both have registered low or negative growth in recent months. It is imperative that we reverse this trend. Supply side constraints upon manufacturing and exports must be removed in double quick time. We intend to work with manufacturers and exporters and implement appropriate short term and medium term measures.

While greenfield investments are important, it is equally important that we implement the projects that are under construction. We need to focus more closely on large projects as well as infrastructure projects. An Investment Tracking System for projects with an outlay of Rs.1,000 crore or more has been put in place. The Prime Minister has set specific targets for key infrastructure sectors. We will review the progress of each of these projects, periodically, in the Cabinet Committee on Economic Affairs and remove the bottlenecks to quicker implementation of the projects.

Some sectors are under stress, for example, petroleum, electricity and textiles. We intend to find practical solutions to the problems that impede higher production or output in the coal, mining, petroleum, power, road transport, railway and port sectors. The Cabinet Committee on Economic Affairs will examine the issues affecting each sector and take decisions that will lead to quantitative growth in these sectors.

Unfortunately, the south west monsoon has been below expectations. Drought-like conditions have been reported from several States. It is the duty of the Government to provide relief to the people living in drought affected districts, protect wage employment and save agricultural production to the extent possible. MGNREGA and other schemes will be converged to meet the challenge of drought. Contingency plans are in place to supply drinking water and fodder and to help farmers replant alternative crops. We must seize the opportunity to build durable assets that will provide employment to the poor as well as help in drought-proofing agriculture in the affected districts.

As I said at the outset, the Indian economy faces many challenges. We are challenged by the global economy. We are challenged by the crisis that has afflicted several leading banks of the world. We are challenged by natural calamities such as floods in one part of the country and drought in other parts of the country. Above all, we are challenged by our own record of fiscal consolidation, high growth, moderate inflation and rise in human development indicators that we achieved during 2004-08. Let us remember that we had faced similar challenges in 1991, 1997 and 2008 and we overcame them. It is widely acknowledged that, today, the Indian economy is stronger and better prepared to face the challenges. Moderate growth in two out of eight years should not dent our confidence.

Several legislative proposals have gone through the full deliberative process and are ripe for debate and passing in Parliament. I seek the cooperation of all political parties represented in Parliament to pass these Bills. With the cooperation of political parties, civil society, farmers and workers, service providers, producers and consumers, and scientists and technologists, I am confident that we will prevail and we will return to the path of high growth, inclusive development, and economic and social justice for all.”

5 comments on “FM P. Chidambaram Promises To Review Vodafone Retrospective Law & GAAR

    Excellence in rhetoric, no better teacher than chidambaram!

  2. S K Agrawal says:

    As a citizen, it is encouraging that Mr. Chidambaram is talking rebooting countries economy. If it is not rhetoric to please the audience, I suggest Mr. Chidambaram collects answer to these simple questions from his secretaries. It may help him fine tune his action plan.

    1) How many of the current parliamentarians will alive, above the age eighteen and had more than average intellect to understand the unspoken words of the legislatures in 1962? What was the compulsion of the then and following parliamentarians to wait 50 years to complete the unfinished task?
    2) I have learnt through news papers that Income Tax officers have been assigned a quota of tax collection. If true, what was the algorithm? In a business house such quota are fixed for marketing executives based on the demographic profile of the territory they operate in and the product they are supposed to market.
    3) What were the considerations to withdraw tax benefit offered to STPI units and not disturb SEZs? How many of these STPI Units have wound Up? Dollar earned by these STPI Units has increased or decreased. And if the Dollar inflow has gone down, who is the person responsible to raise the bogey of revenue loss and kill the golden goose?
    4) I learnt about the acronym GAAR only six months back when it appeared in newspapers. What is the compulsion to did it now? Why can we let it go dormant for a couple of years and then take it up again? It his happened to others Bills in parliament.
    5) How many cases in CIT(A)/ITAT/HC or other judicial forums have been lost by Revenue? Each and every remittance to a non-resident is classified by the Revenue as Royalty Or Fee for Technical Services so that he can collect taxes. Is this not harassment for Indian business man? And in some cases when the decision goes in favour of Revenue, it is Indian business man who pays the due taxes and not the non-resident.
    6) Ex FM in his budget speech dated 7-5-2012 said “The retrospective clarificatory amendments now under consideration of Parliament will not be used to reopen any cases where assessment orders have already been finalized. I have asked the Central Board of Direct taxes to issue a policy circular to clearly state this position after the passage of the Finance Bill”. Why the CBDT Circular on the subject is with conditions while the FM himself did not talk about them while assuring the parliament?

    Reiterate once again, get answer to this questions from your secretaries. This may give you an insight why a business man is not confident in investing and growing. The basic faith itself has been eroded. If we do correct it now, we may soon see exodus of capital to other countries. No point in saying “India is not a tax haven”. Instead of castigating a country, we should find out how do so called ‘tax heavens’ exist and survive? Are they thieves? Are they performing unethical?

    A common man on the street who votes to bring a party in power does not understand fancy words like Reform, Liberalisation, FDI, GDP and the like. All he understands that the prices have sky rocketed and due to rise further due to failed monsoon. Request please set priorities. What all he/she needs is roti, kaparda and makan and does not care of various numeric ratios flashed on him by the media.

  3. Dilip says:

    I am quite surprised to note the elation shown by india Inc on statement of new FM promising review of retrospective amendments introduced in the I T Act by Finance Act 2012. Everybody conveniently forgets the legal panoply for raising absurd tax demand on Vodafone was erected during the time when PCwas the FM. strategy and legal groundwork for IT Department’s case was finalized under his guidance and approval. Pranab Mookherjee only carried forward his legacy. In fact SC negatived the legal arguement s of IT Dept in it’s judgment but one must not forget that from day one the legal principles on which IT Dept was resting it’s case were same and the line of dept’s contention never changed. The arguments and legal justification backing the dept’s case had full support and backing of the then FM who was none other than PC.
    In such background I fail to understand as to why people are entertaining hopes that Govt will now change from it’s stand which hand PC’s full backing from day one.
    Again if one goes through Finance Acts from 2004-2008 then one will come across number of retrospective amendments which were introduced by him to set at naught many judicial pronouncements which went against IT Dept. All such amendments were introduced by the same person who is now promising review and the industry believes him to an honest job. I don’t think the tiger will ever change it’s spot. Rather we shall now get more sophisticated legally elaborate and high sounding clarifications in support of these amendments including. GARR. pl don’t forget PC was the person behind introduction of FBT as also DTC which was contemplating levy of MAT @2% of gross asset value on all companies.

  4. vswami says:

    1 “…. Clarity in tax laws, a stable tax regime, a non-adversarial tax administration, a fair mechanism for dispute resolution, and an independent judiciary …”
    2. “…..path of high growth, inclusive development, and economic and social justice for all.” UQ
    These are the two sets of aspects mainly underlined by the FM as guiding factors for the intended future course of action. But, in essence, the utmost emphasis and concentration needs to be accorded to are really the ones listed under 1 above.
    PC, as the FM then he was, is commonly believed to be the chief architect of the DTC pending legislation. As repeatedly pinpointed from several knowledgeable quarters /expert circles, its text, as last given publicity, is still deficient in certain crucial respects. And, without plugging in the necessary correctives/ making suitable amends, the avowed objective of ‘simplification’ , particularly the other aspects underscored in 1. above, would be left untackled, hence unaccomplished forever. One such deficiency called for to be specially noted is the proposed provision for taxation of income from the ‘transfer of any investment asset’ by a parent company to its 100% subsidiary or vice versa covered by the specified categories. According to a view, the provision has been clumsily drafted, having in mind only the controversy in Voda case , being the very same once again focused on in the FM’s subject Press Release.

  5. R.Sekhar says:

    Pleasant Surprise, as the response is from the same person who in his previous Avatars , as FM , has introduced and justified several retrospective amendments and also validations to legitimize the unlawful exercise of powers of Tax Officers…Change for better?
    One hopes that the review is complete , without discrimination- not just those where Foreign Investors are impacted..

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