There is a bit of triumphalism on display on the part of market fundamentalists in the aftermath of the Vodafone verdict of the Apex Court; they have not, however, realised that the Court was reading and interpreting the law as existed at the relevant point of time.
The Court took care to say that it could not possibly read more to Section 9 (1) of the Income-tax Act 1961 that, by its very design, seeks to empower the Indian income-tax administration to reach out to what appears to be income earned and received abroad, but which has a clear Indian nexus. It also took cognisance of the conscious effort being made by the Direct Taxes Code Bill, 2010 (the DTC) to fill this void.
The implication of these two aspects of the Apex Court judgment leaves little doubt as to the outcome of Vodafone-type cases when the DTC kicks in, though one is not sure whether the seminal change in the DTC would simultaneously translate into actual tax collections from capital gains — earned by non-residents abroad in respect of shares located abroad, but whose underlying assets are in India operated by Indian operating companies — unless it is expressly provided that it is the responsibility of such Indian companies to pay the tax on behalf of the non-resident.
Post-tax returns
Would foreign investors turn their back on India in the face of heightened tax liability that would stare them in the face in the DTC milieu, given that they would have to reimburse the Indian companies the tax paid by them on behalf of the non-resident seller? Of course, in his turn, the non-resident thus buying out another would take care to reduce the purchase consideration
Foreign companies will not be put off by this one-time nuisance, as it were, any more than the redoubtable FIIs, if they were to be called upon to cough up tax on profits made in the Indian bourses.
Foreign collaborators have their eyes on profit from operations, and if this is forthcoming, they don't mind the taxes. Post-tax returns are what matters to them, as indeed it would to the FIIs, who sadly have been let off the hook on the specious plea that if pressured with tax they would vote with their feet out of the Indian bourses, never to return.
Foreign investors like certainty more than indulgence. The tax rates must be stable. The Authority for Advance Ruling is indeed helpful in clearing the air for the non-residents, what with its opinion being binding on the applicant and the Indian tax administration. Parenthetically, the Indian Government should increase the laughably low fee of Rs 2,500 collected from the non-residents for entering its portals. Be that as it may, policies should not be held hostage to xenophobic outbursts and manipulations.
It is not as though foreign investors are entirely helpless or innocent of manipulations. Wily MNCs have over the years perfected the art of setting up re-invoicing centres at tax havens so that the group profits suffer the least tax globally.
With re-invoicing centres being untouched by any tax, the group can arrange and contrive to have bulk of the profits booked in these agreeable locations, rather than where the tax rates are disconcertingly high. The Indian Government's, indeed other governments', attempts at negating such devious schemes by invoking the transfer pricing rules, are bearing limited fruits. Their fascination with Mauritius and other congenial locations for routing their investments into India, too, is not entirely innocent either. But the governments to which the MNCs belong do not bestir to stop these shenanigans, because rocking their boats would have debilitating effects on their economies back home, given that MNCs control two-thirds of global GDP.
Foreign investors then are necessary evils. The developing nations need them but one should not forget that the reverse is also often true. Therefore, let us provide them a hassle-free regime, but not kowtow to them.
The Conversion itch
When privileges are created in favour of certain categories, one itches to belong to those categories. Adulteration of diesel with kerosene is well-known, though adulteration of petrol with diesel is not so well-known. The urge to belong to backward castes is too irresistible for those who are either indolent or frustrated, or both. In the rarefied world of finance and taxation, indulgence of foreigners beckons the Indians to don the robes of a foreigner.
Justice K. S. Radhakrishnan, in his obiter dicta , has eloquently and vividly traced the origin and practice of round-tripping in his separate judgment in the recent Vodafone case delivered on January 20. Indians with black money stashed away abroad move it to Mauritius with effortless ease and channelise the money into India to beget exemption from capital gains tax, thanks to the DTAA between the two countries that allows Mauritius to do dog in the manger —we don't tax capital gains and we won't allow you to tax capital gains either, when earned in India by a resident of Mauritius — real or fake.
(The author is a New Delhi-based chartered accountant.)