Panel urges India scrap retrospective taxation
September 16, 2013, 3:40 am

India is trying to woo foreign investors back after capital flight and currency devaluation [AP]

Retrospective taxation – the act of retroactively applying current legal amendments to preexisting tax assessments – “has the undesirable effect of creating major uncertainties in the business environment and constituting a significant disincentive for persons wishing to do business in India,” the panel said in its 77-page report titled Reforming the Regulatory Environment for doing Business in India.

The panel, chaired by former SEBI chief Meleveetil Damodaran and comprising business leaders and officials across many ministries, was formed by the Ministry of Corporate Affairs after a World Bank report on ease of doing business ranked India 132nd among 183 countries.

The panel was tasked with presenting proposals on improving the business climate to make it easier for local and foreign companies to invest and set up shop in India. The Damodaran panel, as it came to be called, made nearly 20 suggestions in its report tackling legal reforms, regulatory architecture, improving the efficiency of the regulatory process, enabling micro, small and medium enterprises (MSMEs), and addressing state level issues.

“While the legal powers of a Government extend to giving retrospective effect to taxation proposals, it might not pass the test of certainty and continuity. This is a major area where improvements should be attempted sooner rather than later since business cannot take corrective action retrospectively,” said the report.

The issue of retrospective taxation became controversial when the government used it following the Supreme Court’s verdict that British telecom giant Vodafone was not liable to pay taxes to Delhi regarding the 2007 acquisition of mobile phone assets in India and then transferring them overseas. The government claimed that Vodafone should pay $2.6 billion (currency rate at the time) in untaxed capital gains.

The government’s action sent tremors through the foreign investment community.

On June 5, 2013, Delhi offered Vodafone a conciliation regarding the issue.

The Damodaran panel’s report comes as India tries to recoup some of the losses it incurred this summer when the rupee currency plummeted against the US dollar prompting a sell-off of Indian assets by foreign investors and a flight of foreign capital overseas.

India is not alone in currency volatility, however; a number of emerging markets – such as Brazil and South Africa – saw their currencies weaken when the Federal Reserve in the US announced it would curb its monetary easing policies, which over the years enabled foreign investors to see lucrative markets in developing countries.

Source: Agencies