Column : A rock and a hard place

Thanks to Parathasarathi Shome, the government may just have managed to exorcise a large part of the Pranab Mukherjee overhang, at least the part about the bad taxes—the amazingly poor budget arithmetic that will continue to give his successor P Chidambaram sleepless nights, of course, is another thing. So, if all goes to plan, after the mandatory consultation phase on the draft Shome report, we'll see an end to the Vodafone persecution which got so nasty that the finance secretary was briefing journalists on how Vodafone knew about the tax liability and used this to get Hutch to sell at a lower price.

While ideally there should be no retrospective tax on anyone—Shome has said a tax on overseas sales with underlying Indian assets should be prospective—Shome has crafted his suggestions in a way that it causes least loss to the exchequer. Going by the numbers being bandied about, the finance ministry stands to lose around R35,000-40,000 crore from the suggestion since it won't be able to tax other Vodafone-type deals. Indeed, while most of these deals are in the negotiation stage, the government has already collected around R4,000 crore from Essar from its sale of its stake in Vodafone-Essar to Vodafone and another R1,000 crore or so from others like Cairn.

But, after saying such taxes should be prospective in nature, Shome has given another option. In case the government does want to do retrospective taxation, Shome has said, it must tax the seller and not the buyer—since Essar is the seller, therefore, it can still be taxed if this part of the Shome report is accepted. You could argue, and rightly, this is still sandbagging investors since the law permitted them to not pay taxes on overseas sales; but it's still a million times better than taxing the buyers and treating them, in the inelegant taxman's language, as "assessee in default under section 201 of the Act read with Section 9(1)(i) of the Act as amended by the Finance Act 2012".

... contd.

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