MARCH 21, 2012

Budget 2012: Impact of Fiscal Uncertainty on FDI

By Lekh Sood

KEEP aside the worry of inflationary effect of the budget for common masses due to increase in excise and service tax rates, the much bigger is the problem caused by retrospective amendments to Income Tax Act – For example section 9 which is retrospective going back to 1962 (50 years !!).It appears just to collect few thousands cores of rupees (Approx. 30,000 cores as one gathers from reports from newspapers). The intention seems to be to nullify the honorable Supreme court judgment in Vodafone case and also sweep some other such transactions of M&A like Vedanta.

The Govt. through reactions on various occasions is saying that the amendment is clarificatory in nature, is not done keeping Vodafone case in mind, Income Tax Act has history of retrospective amendments and such things have been held to be constitutional by the Judiciary.

One has to consider and look at the far reaching implications of such retrospective amendments. The tax payer especially Foreign investors in this case makes an investment decision in a particular business in India considering the prevalent economic and such other conditions including laws of the land. And one of the factor influences such decision is returns after tax. After investing the money and running the business for decades he is faced with change in tax laws from the times he started business and he has to pay more money as tax which throws all his returns made so for a toss which he could never think of. And all this is for no fault of his as it is also ruled by the Highest Court of the country that the tax payer has followed the law correctly.

Under these situations and environment of tax uncertainty how an investor would feel? Will it not be unjust and unfair on the part of the Government to provide such an environment? Most will agree that an investor will find it strange and disgusting. Any prospective amendment does not give rise to distrust as the investor is supposed to know of prevailing law and it is up to him to take investment decision.

The retrospective amendment of this nature only furthers the tax uncertainty and environment of distrust. This will lead to discourage the Foreign investor to invest in India . There is no point in opening up the sectors for FDI if such an environment of tax uncertainty continue to prevail coupled with litigation arising out of unjust orders of Assessing authorities.

The important point is whether the government is creating tax environment which is stable and certain or not. This is not important whether there are precedents of retrospective amendments and those have been held constitutionally valid. The Government should rather consider the message the country is sending to foreign investors community at large and image of India it is creating by making such amendments in law. Even the existing investors will rethink before further expansions.

The Government should reconsider these retrospective amendments proposals carefully before passing it. What is the objective being achieved. This as one understands would result in increase tax collection. In my opinion, this objective can be achieved much better and bigger way by creating positive environment for tax payers. The Govt should display its commitment and character by respecting the law created by itself and avoid such a move in the larger interest of this country. The law makers should write the law in clear and simple manner so that it captures the intent of the Govt and then stand by it.

It may be noted that neither I am Foreign investor nor in any way connected with Vodafone or any other company which may be affected by the amendment of section 9. These are my personal views as a citizen of this country.