Tax Break

John Fisher, international tax consultant

Archive for the tag “vodafone 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.

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.

Post Navigation