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Ceasing the tax fire

2 September 2015 By Andy Mukherjee

India is holding out an olive branch to jittery global investors. Scrapping a flawed plan to tax foreign fund managers’ past profit marks a welcome truce in the battle over retrospective fiscal demands. But to keep its promise to end “tax terrorism,” the government also has to end disputes with Vodafone and Cairn Energy.

After five months of hand-wringing, Finance Minister Arun Jaitley has agreed to dump an ill-conceived plan to slap a retrospective 20 percent levy on overseas asset managers. It’s probably no coincidence that Jaitley announced the decision to drop the claims, and to close the legal loophole that enabled them, after the Indian stock market fell to its lowest in a year.

It’s a difficult trade-off. An estimated $6 billion revenue windfall would have come in handy as the government pumps up public expenditure to boost growth. However, by collecting a tax that investors rightly saw as unfair, India could have frightened foreign capital that is already fleeing emerging markets, undermining the financing of its current account deficit.

But to be truly welcoming to foreign investors, Jaitley needs to be bolder. The ugly practice of changing the tax code retrospectively started when India’s previous government decided to collect $2.5 billion from telecom operator Vodafone even though Indian courts had ruled the demand was illegal. India has since invoked the same rule in an effort to extract $1.6 billion from Cairn for capital gains that arose from an internal reorganisation prior to the listing of the oil explorer’s Indian unit in 2007.

With those two high-profile cases now in international arbitration, India’s tax regime still looks decidedly adversarial. It’s also unpredictable. The aborted tax was a claim on earnings fund managers may have distributed to investors long ago.

Now that the government is retracting this absurd demand, it’s time for Jaitley to honour Prime Minister Narendra Modi’s campaign pledge to end fiscal tyranny. Declaring a ceasefire is a good start, but it’s no substitute for a permanent peace accord.

 

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