Shome panel has rightly focused on details: Salve

Supreme Court lawyer Harish Salve explains to CNBC-TV18 that the Shome panel report has rightly recommended against retrospective taxation. Salve also highlights that the panel’s recommendation that the retrospective tax should not apply to one who has paid the full money but to one who has earned the income and therefore is liable to pay the tax on the gains, has settled the dust on the issue.

Below is an edited transcript of the reaction on CNBC-TV18. Q: What do you think of the the Shome panel’s recommendations that seem to imply that retrospective taxation should not be implemented and is not correct as far as the taxation architecture of India is concerned?
A: I am happy that the committee has recommended against retrospective taxation. It is common knowledge that when an investor comes and invests in your country, the cost of exit is always taken into account. If you tell that person in advance that he has to pay a 15 percent gain tax on exit, he will factors that in into the purchase price.
When Vodafone invested money into India by every Indian lawyer advised that the transaction would not attract tax. And the deal was structured accordingly. After the FIPB cleared the structure and the Supreme Court confirmed that there was no question of taxing this transaction, the government changes the rules of the game by changing the structure of the investment.
So the message that the Indian government cannot be trusted has been sent out loud and clear. And that has made the investor-sentiment highly negative. When the panel recommends the removal of retrospective amendment, it’s saying the right thing. Q: Is Vodafone therefore, if this recommendation was accepted by the finance ministry, not liable to pay interest and penalty and therefore the possibility of a settlement becoming all the more likely?
A: This is a typical case of the government first raising a ghost and then slaying it. How can the government say that somebody should be penalised for doing something which the Supreme Court said was perfectly right? If you make your law retrospective, it is good as far as the fiscal liability goes. How can the government say a default has been committed on a date when the specific law was not in force?
So the penalty was a ghost raised by the income tax department and now slayed by the Shome Committee. Q: Page 2 of the executive summary says that this would imply that the government could apply the provisions under Section 9(1) only to the tax payer who earned capital gains from indirect transfer. So the Shome panel seems to recommending the government to go after Hutch and not Vodafone, is that correct?
A: As I understand, the Shome panel recommends against retrospective taxation. Secondly, the panel also recommends that if the government is making the tax retrospective, the retrospective part should not apply to one who has paid the full money but to one who has earned the income and therefore is liable to pay the tax on the gains. So, the interest and penalty for withholding don’t arise even for the assessee who has now been made liable for the first time. How can you penalise them? Q: The recommendations say that the transfer of a capital asset situated in India shall be deemed to accrue and arise in India and consequently be taxable. Though it explains the Finance Act, it goes onto say that this should mean and include only such shares or interest which result in participation, in ownership, capital control or management. Therefore, all other types including mere economic interest, should not be contemplated within the ambit of Explanation 5. What do you make of this?
A: Again, the committee wants clarity on the issue. The income-tax department had argued that the transfer of economic interest is in India. So what they possibly want is to bury that argument once for all and say it is only when physical control in India is transferred, then alone will this apply. These are very complex issues and I think the committee has rightly focused on the details rather than on quick-fire amendments.