The two reports by the Parthasarathi Shome Committee on implementation of the General Anti-Avoidance Rules and the latest draft on retrospective amendments are very balanced. One hopes that the government acts without much loss of time, while keeping the nation’s interests in mind. The committee was appointed by Prime Minister Manmohan Singh after an outcry from both global and domestic investors against the retrospective amendment to GAAR in Union Budget 2012-13. It was ostensibly done to plug tax leakage due to abuse of double taxation avoidance treaties that India has with certain tax havens. Mauritius is a favourite route for foreign investments to flow into India. It was also done to boost the muted tax revenues, and this, according to the Shome Committee, was unacceptable.
The Shome Committee has said tax laws cannot be changed with retrospective effect as it shakes investor confidence and should only be done prospectively. (Stock market inflows had fallen to a trickle as the uncertainty over GAAR kept investors away). It has, however, left an option for the government on the Vodafone case by saying, without naming any parties, that if the government opts for retrospective taxation, then capital gains tax should be collected from the seller/entity which has made gains. In this case, it should be Hong Kong-based Hutchison, which in 2007 sold its stake for $11.2 billion.
The income-tax department reportedly stands to lose `40,000 crore if the government junks the retrospective amendment, as nearly a dozen companies are involved in cross-border transactions. But the tax department has only itself to blame. Abuse of this treaty has been going on for many years, with most companies simply being post office addresses. Yet the Central Board of Direct Taxes turned a blind eye. The government, in the case of a similar treaty with Singapore, had modified it to include a clause that a company wishing to invest in India through Singapore should have business of at least $200,000 in Singapore.
The government has been trying to renegotiate the treaty with Mauritius to curb such misuse, and there are indications that there may be some success and a win-win situation for both Mauritius and India. It is a sensitive issue as both the external affairs and commerce ministries don’t want to do anything that would disturb the relationship with the island nation, which they regard as critical for both foreign and trade relations. Mauritius is a gateway for several Indian companies who trade with Europe through that route. Financial services is one of the three key revenue earners for Mauritius, besides sugar and tourism, and 99 per cent of financial services are focused on India. So the Indian government has to tread extremely carefully.