Shell-shocked
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The biggest deterrent for any for- eign investor in the manufacturing or service sector is not the lack of roads, ports or other infrastructure but the utterly savage and irrational manner in which our tax laws are drafted and implemented.
P. Chidambaram’s recent roadshow across Asia and Europe was intended to attract foreign direct investment (FDI). All is well with India, he said. The India growth story was not over and it still made sense to invest dollars, euros and yens to set up establishments in India. But the absurd demand made from Shell has completely obliterated any goodwill or confidence Chidambaram may have generated. The expenditure incurred on his foreign trips can be simply written off.
We never seem to learn from our mistakes. The Vodafone judgment was a significant event that demonstrated the robust independence of the Indian legal system. It sent a message that the rule of law prevailed in India irrespective of the tax involved. The judgment, if left alone, would have resulted in huge inflows of FDI. Last year’s Budget, perhaps the most retrograde in living memory, destroyed all the goodwill this judgment generated. The UPA government went out of its way to deliver the message to the world that the Indian government could never lose. If the Supreme Court gave a particular interpretation favourable to the assessee, it would be simply overturned even if it meant amending the law retrospectively for 50 years. International outrage forced the government to beat a hasty retreat, and the Shome Committee was constituted to make some face-saving recommendations.
The demand against Shell India shows the revenue department never gives up. Faced with meeting Himalayan revenue targets, it resorts to patently shocking demands, completely oblivious to how counterproductive they are from a national perspective. It never occurs to the government that making demands just to meet targets is a short-term measure that can have devastating long-term consequences. It is no surprise that FDI inflows over the past year have been almost nil. It is also not surprising that gross domestic product growth is now below the six per cent level.
The Shell India case is another example of demands being made that are totally contrary to elementary principles of law. Shell India needed capital for its operations in this country. It issued 87 million shares to another group company at a par value of`10. The department’s case is that each share was actually worth`183 and by issuing shares at par value, there was an undervaluation of shares, thus resulting in evasion of taxable income. There is not a single reported case which has held that the dif-ference between the value of a share and the issue price amounts to income. At best, the selling of a share at a price below its value, may have resulted in a ‘deemed gift’under Section 4 of the erstwhile Gift Tax Act, 1957. But the difference can never be treated as income. Further, the question of‘undervaluation’ arises mostly in the context of transfer pricing. When the issue price of the share is not taxable at all, a question of adjusting the transfer price for this sum will never arise.
According to the logic used in the Shell case, every time an Indian company issues shares to its holding company at a price less than its alleged value, the difference will be taxable as income. There is no basis for such a demand under the Income Tax Act and its absurdity can be demonstrated by taking a converse example. A subsidiary company is in financial difficulty and the parent company infuses capital by subscribing to its shares at par value. If the face value is `10, but the actual value of the share is one rupee, will the difference be treated as a loss and permitted to be adjusted against taxable income?
The other serious consequence is the likelihood of the department re-opening assessments in all cases where shares were issued by an Indian company to its foreign-holding company. Each case may now be examsined to determine whether the prices at which the shares were subscribed was lower than their ‘value’. The revenue department can exult in making demands of several thousands of crores and only further reduce India’s attractiveness as an investment destination.
The Shell case also demonstrates the utterly irrational manner in which the various provisions of our direct and indirect taxes are implemented. The transfer pricing provisions and the provisions for re-opening of assessments are often blatantly misused with severe financial consequences for taxpayers. Notices for reopening of assessments are issued on the most preposterous grounds and there is an unfortunate reluctance on the part of several high courts to entertain writ petitions against such unreasonable demands. There are several cases where the benefit of tax holidays are sought to be denied by resorting to reopening of assessments. These benefits were given to attract investment and promote economic growth. But four years later, these are sought to be taken away by reopening assessment on some ground or other.
As we approach February 28, 2014, the real danger is not in what will be provided in the Budget. The greater concern that must be addressed at the earliest is the repeated misuse of various provisions of the Income Tax Act, 1961. The collection of revenue, albeit important, cannot be considered in isolation. Sensational demands cause greater long-term damage than the possible increased tax collections.
In his classic novel, 1984, George Orwell coined the expression “doublethink”which meant the power of holding two contradictory beliefs in one’s mind simultaneously and accepting both of them. India is facing the disastrous consequences of“doublethink”. Incredibly, we have the contradictory belief that India can become an economic superpower while simultaneously taxing our citizens and corporations in a completely arbitrary manner.
The author is a Senior Advocate of the Madras High Court.