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Archive for the category “India”

The Unsatanic Taxes

funnyroadNobody who has read Salman Rushdie’s classic ‘Midnight’s Children’ can be indifferent to the juxtaposition of India and Midnight in a phrase or sentence. So, the recent announcement that India’s new GST law (VAT by any other name would smell as sweet) would come into effect, amidst much fanfare, at midnight on July 1 was enough to make my heart flutter like a punkahwallah’s punkah.

The world’s biggest democracy has finally joined the vast majority of the globe’s tax-setters in a cross-twenty-nine-state system that, when the technological problems are sorted out, should improve India’s tax-raising efficiency and, thus, help that great country in furthering its economic growth.

That is not to say that VAT is the Mother Teresa of all taxes. Its biggest problem is that it is regressive –  it taxes consumption at the level of the poor-man-in-the-street who, the poorer he is,  spends a higher proportion of his income on surviving. This is traditionally combatted by lower rates or exemptions on basic things like food. Indeed, India – in keeping with its tradition of making everything as complicated as possible – has introduced five rates of VAT  plus a stratospheric concoction for dealing with untouchables like luxury goods and tobacco.

Of course, there will still be those who manage to get round the tax, legally or otherwise. Time will tell whether devious residents latch onto the ubiquitous Carousel Fraud phenomenon (involving the import and export of the same goods multiple times – a bunch of Brits were caught a few years back when they got lazy and stopped changing the plugs on phone chargers between France and England). And then there was the hard-to-believe wheeze of the Spanish theatre that sold VAT-exempt carrots for admittance to its performances together with a worthless piece of paper called a ticket. The only problem (apart from the Spanish tax garrotters catching up with them) was that hungry patrons couldn’t prove their right to re-entry to the auditorium after a toilet break during the intermission.

At the end of the day, VAT works. One of the few countries that does not seem to agree is the ‘biggest’ democracy (as opposed to the ‘biggest democracy’). A few years ago, at lunch at a conference in Berlin, a group of American experts were discussing ways of plugging the impossible US deficit, coming up with all sorts of supply-side ideas. Thinking that V.A.T was the sort of acronym (actually sayable, like M.A.D – Mutual Assured Destruction) that Americans would die for (especially when said with an English accent), I suggested that imposition of such a tax would surely solve all their problems. I was completely frozen out. V.A.T is a dirty acronym in the eyes of Uncle Sam. My luncheon partners looked like they wanted to drag me in front of Senator Joseph McCarthy’s Un-American Activities Committee. The irony, of course, is that while V.A.T undermines the ‘redistribution of income’ philosophy of most of the ’red’ nations (such as Britain and Europe) imposing it, the American belief in ‘equality of opportunity’ is completely at peace with its workings.

The Indians still have a long way to go. Their direct tax system leaves much to be desired – the witch-hunt of Vodafone to cover the seller’s capital gains in an offshore purchase a while back, and its treaty-defying Dividend Distribution Tax being but two examples of the rot.

As Rushdie put it in Midnight’s Children, ‘I admit it: above all things I fear absurdity.’ Thankfully, his beloved India is finally taking steps in the right direction.

Dial M For Modi

'Mind the gap, lass'

‘Mind the gap, lass’

Bored out of my mind on a bus journey through the northeastern city of Sunderland around forty years ago, I involuntarily tuned into one of the working-class conversations going on around me. Not one word. Not one single syllable. They may as well have been talking Polish (which, nowadays, they probably would be). Forget that line about the English and Americans being two peoples separated by a common language – this was one people separated by the Watford Gap (an almost mythical motorway service station about half way up the country).

The fact is that, when it comes to understanding English speakers, some accents are more understandable than others. The Scots (from whom I hail) are notorious, but the loveable Indians are world champions in incomprehensibility.

They did extensive business with the subcontinent

They did extensive business with the subcontinent

Don’t believe me? Next time you are invited to participate in a telephone conference call with India, watch your colleagues. Guaranteed, there will be a finger permanently poised above the mute button, ready to activate it at the first drawn-breath to discuss what the participants think the other guy said. Then, as the call proceeds, your lead person’s head will gradually home in on the phone, until his ear is in communion with  the loudspeaker. It is another myth, that the closer you get to the speaker, the more you understand.

Of course, the irony is that India is the epicentre of Telephone Service Centres. Need help anywhere in the world? Call India, and walk away more confused than when you started.

Given the importance of the telephone to the Indian economy, it is perhaps not surprising that some of the biggest tax controversies in recent years have involved telecommunications. Less clear is why they have involved a single company.

Vodafone has been persistently persecuted by the Indian tax authorities over the last decade. It started when they bought an Indian group from Hutchinson at the ultimate holding company level, several countries removed from India. Although the tax burden, if any, should have fallen on Hutchinson, Vodafone was hit for not deducting tax at source. When the company successfully claimed in the Supreme Court that there was no legal basis for the tax authority’s claim, the Congress-run Government promptly changed the law with retroactive effect to 1961. At time of going to press, Vodafone and the Indian people were still staring each other down. Needless to say, this has done wonders for foreign investor confidence.

Meanwhile, the fairly new BJP Government of Narendra Modi has been making soothing comments about regulation and business. At the end of January the authorities announced that they would not appeal a decision in favour of, wait for it, Vodafone, concerning the taxation of a share issue. Vodafone’s Indian company, owned through Mauritius, had issued new shares to a Mauritius holding company for a premium that the tax authorities claimed to be ridiculously low. As a result they claimed that income had been created. The company argued that, even if the price was too low, this was a capital transaction in the shares (which, I suspect, would not be liable to tax under the relevant India/Mauritius treaty). The government has caved in, citing the need to provide certainty to foreign investors in tax matters. Hallelujah!

"What do you mean: 'Please send me an e-mail'?"

“What do you mean: ‘Please send me an e-mail’?”

Perhaps the next U-turn will be in respect of the Hutchinson  purchase. The previous government got its lines crossed and failed to understand the effect it was having on foreign investors. Narendra Modi has stated repeatedly that he wants to make India a draw for investment. I wonder if he knows Vodafone’s number?

They shoot horses, don’t they?

And how much tax do you think you will have to pay this year?

And how much tax do you think you will have to pay this year?

“It’s under starter’s orders – and they’re off!”  2013 has scarcely made it out of the stalls and two stories are already vying for a place in the Winner’s Enclosure at the annual Let’s-Knacker-The-Taxpayer Steeplechase.

First to gallop off the page and nearly knock out my eye was the disclosure by the Wall Street Journal that the Indian Government has come knocking  on Vodafone’s door asking when it can expect to receive the $2.5 billion owed to it. Readers will recall that, after a  long-running dispute between the telecommunications company and the Indian Government over a withholding tax issue, the Government fell badly at the final Supreme Court fence.  However, a minor setback like this could not deter the Trustee of the biggest democracy in the world, and the Lok Sabha promptly passed retroactive legislation (to 1961, to really put the boot in) to ensure the Government would still win the race. Following international uproar last year, it was widely thought that the Indian Government had backtracked, but this was evidently not the case. The parties are now said to be locked in negotiation to try to find a way out of the impasse. It’s anybody’s bet what the outcome will be.

Next, The Economist informed its readers that MMX, a Brazilian mining giant, had been presented with a $1.8 billion tax, fines and interest bill representing 90% of its market value. This was in the wake of similar demands sent to other major companies. Brazil, as everyone knows, has more types of tax  than Heinz has varieties of food. It is almost impossible to get tax reporting right but that does not explain the telephone number amounts the tax authorities are chasing. It appears that the only way of dealing with these claims is by spending 15 years in the court system by the end of which, either a convenient tax amnesty comes along or the companies gamble on a favourable court decision.

Darling! The postman just delivered our 2012 Tax Return

Darling! The postman just delivered our 2012 Tax Return

Whatever the case, the governments of India and Brazil – members of Jim O’Neil’s BRIC Quartet – are suffering from sunstroke. The other two – Russia and China – less exposed to  sun, sand and democracy (sorry, Comrade Putin) are faring much better on the taxation front. India’s government, immobilized  for years by geriatric dementia is a well-known basket case – although the elevation of its disastrous Finance Minister to the presidency and replacement by an old  favourite of the business community, was supposed to offer the start of a cure. Brazil, on the other hand, has been trying to feel its way forward and find ways to cut the number of taxes. Faced with various regional problems, however,  President Dilma Rousseff has, so far, felt herself unable to deliver. In Sao Paolo a couple of years ago, I sat through an interminable speech by former President Fernando Henrique Cardoso.  He admitted that he had been to blame for the carnival of taxes when priorities were to bring inflation under control, get  the country moving and keep the military in their barracks (I made the last one up – but I’d wager  he would have liked to have said it) – but now it was time to scrap the lot and become a normal country. Deaf ears.

What is sad is that, countries that are so critical to the sustainability of the world economy in the next half century, are using every opportunity to give prospective investors the heebie-jeebies. It would appear that, no less important than reasonable tax rates (I hear former French President Bling-Bling is thinking of moving to London – sacrebleu!) is certainty about the tax to be paid.

What is interesting, however, is that evidently none of this makes it into macro-economic modeling. Now I admit I am on dangerous ground here. My last day of formal macroeconomic study was a third of a century ago and, when I raised this point with  none other than the editor-in-chief of The Economist at a conference a while ago, he took one look at my disappearing hairline (I am being kind to myself) and politely commented that, while I was clearly a young man, macroeconomics had moved on since my university days. He did add, however, that he agreed there was something in what I said (which was probably because he was desperate to get past me to the coffee).

It was none other than his own Economist ( how much name dropping can I do in one post – President of Brazil, Editor of The Economist?) that ran an article last week on – you guessed it – macroeconomic modeling. It turns out that macroeconomists managed to get through the entire 20th century – Great Depression, Milton Friedman and all – without factoring Banks into the basic equation. In a world where everything left out was ceteris paribus (the term meaning “other things being equal”  makes me tingle with nostalgia), banks were assumed to just be facilitators between lenders and borrowers. Blimey! In reality banks have been upsetting the apple cart for generations and, what with their showing in the recent Financial Crisis, it is a relief that they are now being included as independent factors. But what about taxation?  Tax is obviously there – always the something minus “t” to establish numbers and multipliers. But the idea that taxes are, or should be, neutral was abandoned years ago. The destabilising effect of wacko tax policies needs a place at the macroeconomic table. What India and Brazil are doing with their strong-arm tactics is not only not “ceteris paribus”, it is “casus belli” and many other impressive Latin phrases I can’t quite think of at the moment.

Dodgy business

Dodgy business

2013 has a long way to go and a lot of fences to clear. Ever since my very  first audit assignment at a Betting Company I have had my doubts about Horse Racing. But India and Brazil are famous for their fair play in Cricket and Football, respectively. For all our sakes, let’s hope they get their eye back on the ball. Carpe Diem (that’s another one for you).

India – hitting investors where it hurts

The Italian calls the shots - and what does she know about cricket?

As a sport  that dictates: “when you are out you are in” , the vast majority of the world’s population may be forgiven for not understanding cricket. Not so  the man on the New Delhi Omnibus for whom the game is a way-of-life. While recent cricket scandals have tended to emanate from India’s nemesis, Pakistan, a number of madcap actions by India’s lacklustre government since the beginning of this year have suggested that the geriatric ministers have forgotten the basic tenet of the game – fair play. Put plainly, it simply isn’t cricket.

With clients like him no wonder the textile industry needs protecting

It all started with the welcome announcement that the inefficient retail trade was going to be opened up to foreign investors – sparking massive interest especially amongst the major international supermarket chains; vested interests stepped in and the government backtracked. Next came restrictions on the export of cotton to protect the local textile industry which, thanks to an international outcry and – probably more importantly – protests by Indian cotton farmers, were scrapped.

But perhaps the most absurdly aggravating of all was the Budget announcement of March 16. Regular readers of this blog will recall that, earlier this year, the Supreme Court struck down lower court decisions regarding a claim by the tax authorities that they were entitled to $2.5 billion from Vodafone for the capital gain purportedly accruing to Hutchinson on the indirect purchase of Indian operations from one of its offshore companies. Coming 3 days before the Supreme Court rejected the government’s request for a review of the decision and all 121 points of contention, it was not surprising (if galling, and arguably silly)  for the Finance Minister to announce  a proposal that the law would be amended to ensure that such deals would not escape liability in the future. What smacked of the batsman sending the ball crashing through the Club House window straight into the smiling face of the barman, was that the proposal was to apply the amendment retroactively to April 1961 (let’s write that slowly for emphasis – April… Nineteen…Sixty…One). That was the month that Yuri Gargarin became the first man to go into space, and it certainly appears that the Indian Government is, like the fictional Robinson family, Lost in Space.

All these issues, and especially the last, leave foreign investors up the Khyber Pass without a paddle. The world’s biggest democracy seems to be losing its way. While experiencing record growth rates in the middle of the last decade (estimates of around 10%) current GDP growth is at around 6%, which is impressive when compared to western economies, but is not enough to pull the Indian masses out of poverty. While Indian companies are successfully investing overseas (look at Tata which is spreading everywhere) the country is in desperate need of foreign private investment. Current actions of the Indian government are not the way to go about encouraging that.

Australian batsman showing the professional way to react to Bodyline

One of the first big scandals in international cricket may provide a pointer to India’s  rulers. Back in 1932 England’s team traveled to Australia to try and regain the Ashes (the prize for the hotly fought biennial tournament between the two countries). England could not see any way round Australia’s invincible batsman, Don Bradman, until the captain Douglas Jardine noticed in film footage that, when balls were accidentally thrown in a manner that threatened to collide with his upper body, Bradman recoiled. Thus was born the concept of “Bodyline”.  Bowlers  aimed to bounce the ball short, well  before it reached the batsman so that he either ducked or hit a defensive shot that could be easily caught – thus dismissing him. Bodyline was totally within the rules of cricket but it was, simply, not cricket. The English team was roundly condemned and the rules of cricket were gradually changed.

India is today playing according to the rules – its democracy functions and it is legally within its rights to throw anything it likes at foreign investors. But it runs the risk that those same foreign investors will walk away. Not literally- India is too big a potential market for them to ignore –  but in the extent and efficiency of their investments. If India is to regain its high growth rates it has to play fair with foreigners.

Sorry, wrong number

The first to hit the catwalk at the Miss World Tax beauty contest that spanned year-end was Lady Justice New Zealand with a December 12 landmark tax avoidance decision. Following close  on her high-tax heels on December 19 was Lady Justice Canada with an insight into the application of the General Anti-Avoidance Rule and  only a day later Lady Justice Denmark strutted along with her first Beneficial Ownership Case. But the most stunning of them all exploded onto the runway on January 19 with all the self-confidence of an odds-on favorite.

Lady Justice India’s Vodafone case has eclipsed just about everything else in the international tax world over the last ten days. “Her justice system has been gloriously vindicated,” her sponsors effused, omitting to mention that the Supreme Court had just totally laid waste a number of orders of the Bombay High Court at the end of a four and a half year legal battle that had cost countless rupees and substantially any remaining goodwill towards the Indian taxation system. A closer inspection, following removal of the Lady’s blindfold, revealed two heavily bruised eyes.

I do not propose to delve deeply into the details of the case which has received wall-to-wall coverage (if you have a free evening, google: india, vodaphone, supreme court, duh-which-words-in-the-law-didn’t-you-understand-?) but , in a nutshell, for those who have been more concerned with trifling matters such as Iranian sanctions and the US election it went like this:

A Cayman Island subsidiary of  the Hong Kong based Hutchinson Group sold its shares in another Cayman Island company to a Netherlands subsidiary of the UK based Vodafone group. It just so happened that somewhere way down the chain under the purchased Cayman Island company was an Indian company with a gargantuan Indian mobile phone business. The Indian tax authorities were not terribly pleased that they had missed the chance to tax Hutchinson on the capital gain on sale of the Indian business that they claimed would have applied had the Indian company been sold directly (but that is a whole new story that we will not go into here), so decided to slap a $2.5 billion tax bill on – wait for it – Vodafone, for not having withheld the required Indian tax when paying for the Cayman company.

Now, for people like me with warped tax-drugged minds this did not, when the case originally saw the light of day, come over as quite as moronic  as it must sound to normal human beings who do not drool at the mouth. An albeit diminishing number of countries do still allow the taxation of the sale of indirect holdings in their jurisdictions and, indeed, the strict enforcement of withholding tax obligations on a payer, including criminal penalties for non-compliance, is regularly a cornerstone of, at least domestic, tax collection policy. 

The problem is that, now that the dust has settled, clearly none of this applied to India. The judgment was quite simple really – every single one of the tax authorities’ claims was rejected and the orders of the Bombay (should that, politically correctly, be Mumbai?) High Court were emphatically overturned. I am no expert in Indian tax law but, reviewing the Supreme Court decision, it did seem to be almost a case of just joining up the dots. The tax authorities  may be forgiven  (although I would not agree)  for begrudging $2.5 billion slipping between their fingers but I fail to begin to  understand what happened in the Bombay (Mumbai) High Court.

Who needs foreign investment, anyway?

There are several reasons why India is a highly favored location  for investors today. None of them relate to taxation or the legal system. The tax system is antiquated and rates are too high. The proposed new Direct Tax Code leaves much to be desired. Bureaucracy is horrendous and, as Vodafone discovered, even the Bombay/Mumbai High Court couldn’t  be relied on to get it vaguely right.

In his award-winning novel “Midnight’s Children”  set around  India’s first thirty years of independence Salman Rushdie’s  hero, Saleem Sinai, says “No people whose word for ‘yesterday’ is the same as their word for ‘tomorrow’ can be said to have a firm grip on the time”.  In case nobody noticed – “The times they are a-changin’ “. It is evident that there is still much work to be done.

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