Signalling a stable and investment-friendly regime to investors, the government on Wednesday decided not to appeal against the Bombay High Court order granting tax relief to Vodafone. “The government will not appeal in Supreme Court the October 10 order of the Bombay High Court in the Vodafone case… We want to convey a clear and positive message to investors globally that we will be fair, transparent and within the four corners of law,” Telecom Minister Ravi Shankar Prasad told reporters after a Cabinet meeting. According to an official statement, the Cabinet also decided to accept all other “orders of courts, ITAT (Income Tax Appellate Tribunal), DRP (Dispute Resolution Panel) in cases of other taxpayers where similar transfer pricing adjustments have been made and the courts, ITAT, DRP have decided or decide in favour of the taxpayer”. The government’s decision, taken with a view to avoid “fruitless litigation”, will provide a breather to several multinationals which are engaged in similar tax disputes with the Income Tax department. Besides Vodafone, these companies include Shell, IBM and Nokia. The decision was taken following the opinion of the Attorney General, CBDT chairperson and the Chief Commissioner (international taxation). It comes at a time when the Narendra Modi government is wooing foreign investors for the success of its flagship programme ‘Make in India’. In the last few weeks, both the Prime Minister and Finance Minister Arun Jaitley have expressed the government’s keenness in ensuring a stable tax regime and doing away with complexities. The official statement said the decision would bring greater clarity and predictability for taxpayers as well as tax authorities and put an end to the “uncertainty prevailing in the minds of foreign investors and taxpayers in respect of possible transfer pricing adjustments in India on transactions related to issuance of shares”. The case pertains to 2009-10 and 2010-11, wherein Vodafone India Services Private Limited (VISPL), a wholly-owned subsidiary of Vodafone Teleservices (India) Holdings Ltd, Mauritius, issued shares to the parent company at a premium of Rs 8,509 per share. It received a consideration of Rs 246.30 crore from the parent company. According to VISPL, this was an “international transaction”. However, the transfer pricing officer (TPO) made an addition of Rs 1,397 crore to VISPL’s total income, alleging that the company had underpriced the shares. The dispute resolution panel upheld the TPO’s decision. However, the Bombay High Court in October 2014 quashed the TPO’s order and said the tax can be charged only on income and “in the absence of any income arising, the issue of applying the measure of arm’s length pricing to transactional value/ consideration itself does not arise.” Prasad said the Cabinet was of the view that “this is a transaction on the capital account and there is no income to be chargeable to tax. So applying any pricing formula is irrelevant.” Tax experts welcomed the move and said the decision showed the government’s commitment to a stable tax regime.
India has dropped down two places to stand at 142nd out of 189 countries ranked by the World Bank for ease of doing business, underscoring the tough task that lies ahead of the Narendra Modi government, which has said it wants to make India a business-friendly country.
In the ten metrics used to measure ease of doing business in the Bank’s 2015 report, which covers the period from June 2013 to May 2014 (when the UPA was in power), India came close to the bottom in two categories. It stood a wretched 184th in the category “Dealing with Construction Permits,” and 186th in “Enforcing Contracts.”
On the bright side, India stood 7th, an improvement of 14 places, when it came to “Protecting Minority Investors.” It is the only category in which India has shown an improvement from 2013, when it was ranked 21 in this category and 140 in the overall ease of doing business.
Ranking in other eight categories are: Starting a business (158th), Getting electricity (137), Registering property (121) , Getting credit (36th – down from 30th place), Paying taxes (156), Trading across borders (126), and Resolving insolvency (137).
Getting construction permits in India involved an average of 25 procedures that took 186 days, and cost 28 per cent of the warehouse value. Enforcing contracts took 46 procedures and 1420 days — nearly four years. Getting electricity took 106 days and registering a property took 47 days.
Indicators measured in Mumbai, India’s business epicenter, showed that it required 13 procedures to start a business, and it took 30 days to accomplish this, compared to an average of 4.8 procedures and 9.2 days in advanced economies.
The Modi government, which aggressively made ease of doing business part of its agenda and has already initiated some steps, has plenty to chew on in the report that chronicles how enervating it is to start a business in India. For instance, it takes five days to pay stamp duties online, file all incorporation forms and documents online and obtain the certificate of incorporation and five days to request and obtain Certificate to Commence Operations.
It takes between a week and 12 days for each of the following procedures: Obtain a Permanent Account Number (PAN) from an authorized franchise or agent appointed by National Securities Depository Services Limited (NSDL) or Unit Trust of India (UTI) — 7 days; Register with Employees’ Provident Fund Organization — 12 days, simultaneous with previous procedure: Register for VAT online — 10 days, simultaneous with previous procedure; Register for medical insurance (ESIC) — 9 days, simultaneous with previous procedure; Obtain a tax account number for income taxes deducted at source from the Assessing Office in the Mumbai Income Tax Department — 7 days.
All of India’s neighbors except for Bangladesh (173) and Afghanistan (193) were ranked higher. China topped the neighborhood at 90, followed by Sri Lanka at 99, Nepal at 108, Bhutan at 125 and Pakistan at 128. Singapore stood first overall for the ninth year in succession, and is followed by New Zealand, Hong Kong, Denmark, and South Korea.
The Narendra Modi government may be talking of economic reforms, but the confidence of global investors in the Indian economy still seems jittery. Honda’s global chairman Fumihiko Ike has said that doing business in India remains difficult and processes in the country are “complicated” and “burdensome”.
Ike, who also heads the crucial Japanese Automobile Manufacturers Association (JAMA), said the new government should take steps to improve the investment in the country as poor infrastructure and uncertain tax regime makes it tough to do business in India.
Ike’s statement comes a day after British telecom giant Vodafone echoed similar sentiments and European oil major BP also expressed “frustration” over the delay in gas price hike, which was delaying the proposed investment by the company. Vodafone, which battles a Rs 20,000 crore claim by the government over a capital gains tax issue, said foreign companies find it “difficult” to do business in India because of slower government clearances.
Speaking at the 54th annual convention of Society of Indian Automobile Manufacturers ( Siam) here, Ike said the Indian government needs to take steps to make the country an attractive destination for foreign investors and “improve the business environment for investments”.
Ike said component suppliers to automakers “encounter problems” in getting business permits and having their paperwork done and many of the processes related to the setting up of factories are “complicated” and thus require simplification.
Ike made a special mention of the tax regime in India which he said was “burdensome” when compared to other countries. This, he said, was “impeding investments” in India.
The Honda chief sought an early rollout of a single goods and services tax. “India has a complex domestic tax system. We want a single tax system.”
However, while highlighting the problems being faced by foreign investors, Ike had a special mention for Prime Minister Narendra Modi who promised the ease of investments in India during his recent trip to Japan.
Ike said the Japanese investors were enthused by Modi’s call to increase investments in India. “He has promised that red tape will be replaced by red carpet. This makes us optimistic on making investments.”
BP Plc, whose $7.2 billion investment in 2011 was the largest foreign investment in the energy sector in India, said on Thursday that the delay in implementation of a natural gas price hike was frustrating.
“We are ready to go ahead with our first project which is probably a $4 billion project. We are getting ready to potentially move that forward (but) are waiting for the gas price decision. So, is that frustration, yes because it was decided last June 2013,” said Sashi Mukundan, regional president and head of country (India), BP Group.