Retrospective tax was indefensible; burying it shows pragmatism

 Institutional arrogance in taxation has cost India dearly in terms of its image as a business-friendly, rule-driven country

I distinctly remember the union budget in which Pranab Mukherjee, as Finance Minister, sneakily introduced the retrospective tax. I was at a post-budget panel and as usual for all budgets, the entire panel, including me, were busy giving 11 marks out of 10. That was until somebody whispered into our ears that in the fine print, there was a clause bringing in a retrospective tax amendment to ensnare Vodafone.

Obviously, the budget marks went down sharply to 10/10: a full mark was deducted by the panel for this horrendous decision.

After that, a whole saga ensued in which the entire tax mechanism and the Finance Minister went all out to defend the indefensible. The trend continued even after governments changed and proclaimed there would be no tax terrorism.

Before that, I remember when the Bombay High Court's Income Tax bench ruled against Vodafone, which had appealed against the income tax department's first order on tax levied on something called "indirect transfer"! I was astounded. It was as if the shares of a company could be directly linked to some of its assets.

Vodafone appealed and the Supreme Court did the right thing by setting aside the order of the Bombay High Court. This then led to the infamous retrospective tax amendment.

A point is often missed in this entire imbroglio: capital gains taxes is levied on the person receiving the capital gains and not on the person paying out the capital gains. This point should be obvious to everybody. The bizarre thing is that Vodafone was the buyer and Hutch was the seller of the shares of the overseas company, which held the local Indian company. The capital gains had accrued to Hutch, and not to Vodafone.