Some sense at last on GAAR, but PM too must share the blame

At long last, some semblance of sense seems to be dawning on the UPA government in respect of some of the regressive tax measures proposed by Finance Minister Pranab Mukherjee in Budget 2012.

Under the draft guidelines that the Finance Ministry unveiled on Thursday, the general anti-avoidance rules (GAAR) - a measure to plug egregious tax evasion - will be invoked against foreign investors only if they have opted to derive the benefit of tax treaties that financial jurisdictions have entered into with India.

Additionally, it now appears that the invocation of GAAR provisions will be subject to a “monetary threshold” that will spare the small fry and go after only the big-ticket tax dodgers.

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[caption id=“attachment_360326” align=“alignleft” width=“380” caption=“They were all in it together. PTI”]  [/caption]

More significantly, there appears to be some rethink on the infamous Section 9 of the Income Tax Act - the so-called ‘Vodafone’ tax - that provided for retrospective taxation on indirect transfer of assets. Finance Secretary RS Gujral said on Thursday that Prime Minister Manmohan Singh, who doubles as Finance Minister, had sought clarification on this tax proposal - which was so dear to Mukherjee - and that the ministry would provide them in a few weeks.

Let’s be very clear about it: there is nothing wrong with plugging tax loopholes that foreign investors, who nimbly move money across jurisdictions, brazenly exploit. As Pranab Mukherjee rightly said, India isn’t a tax haven, and if the price that foreign entities have to pay to get a piece of the action in India is “to render unto Ceasar the things that are Ceasar’s,” there’s absolutely nothing wrong with it.

So, it is easy to understand Pranab-da’s frustration at seeing Vodafone, one of the more Artful Dodgers of taxation in all the jurisdictions it operates in, walk away without paying the “cover price” for its acquisition of Hutchison Telecom’s assets in India. (Of course, it is Hutchison that ought to have been taxed on the gains it made, but since the government had no hold on the seller, it went after the buyer.)

But where Pranab-da erred was in going overboard with hisexertions to knock the stuffing out of Vodafone, even after the company won its case in the Supreme Court, and to serve a hefty tax bill on it with retrospective effect. More egregiously, he used it as an excuse to slip in Section 9, which would potentially have reopened all such cases going all the way back to 1962.

And he openly dared foreign investors to go away if they weren’t happy, pointing out that it wasn’t as if we were all eating lizards before foreign investors discovered India.

If Pranab-da had used the Hutchison experience (and the mortification of the government’s losing its case before the Supreme Court) to issue a stern warning to foreign investors that, going forward, such transactions will face the full force of taxation, there would have been no quarrel with him. It is the invocation of the law with retrospective effect that was wrong in spirit, even if, as has been argued, any sovereign government has the right to impose any tax measure it deems fit.

India isn’t, of course, the first country to wield such tax bludgeons with retrospective effect - but, here’s the thing: whoever does it, it is wrong in spirit. You can argue till the cows come home that you have the right to do as you please, but might isn’t always right_._ As the government learnt since then, when foreign investors take their money and run, we lose far more - in terms of shaken confidence in the India story and policy certainty - than the one-time tax hoard that the government would have netted.

Manmohan Singh’s efforts to reverse what was patently a wrong move on the part of the Finance Ministry under Pranab Mukherjee are, to that extent, welcome. But it also opens up for scrutiny the mechanics of policymaking by government officials. Pranab Mukherjee may have been Finance Minister, but he wasn’t presenting his budget: he was presenting the UPA government’s budget, for which Manmohan Singh, as Prime Minister, is fully accountable.

To the extent that the budget represents the economic philosophy of the UPA government, taxation issues should transcend above the personal whims of incumbent finance ministers. Economic policymaking should be de-personalised; it should be institutionalised.

The narrative that is gaining traction now - that “reformer” Manmohan Singh is coming riding like a knight on a white steed to “rescue” the economy from the depths of despair that Pranab Mukherjee had pushed it into - is just plain disingenuous. Manmohan Singh and Sonia Gandhi, the power behind the throne, were just as culpable in driving the economy into the ditch.

Wisdom may have dawned late on the UPA government on some of the flawed taxation proposals - and to that extent it is welcome - but the government has sufficient cause to reflect on the flawed mechanics of policymaking that derailed the economy and caused foreign investors to flee.