New Delhi: The policy of retrospective taxation has “adversely affected” the inflow of foreign capital from the UK to India, and will continue to act as an “irritant”, according to UK-India Business Council (UKIBC) CEO Jayant Krishna.
In an interview with ThePrint, Krishna said the ongoing retro tax disputes between British conglomerates Cairn Energy and Vodafone Plc and the Indian government continue to bring in a sense of uncertainty within the UK business community, and this uncertainty needs to be resolved soon to boost business and investments ties.
Britain is currently undergoing the process to exit the European Union, known as Brexit, with the transition process due to end on 31 December this year.
“The retrospective tax issue has surely been an irritant. It is not just Cairn or Vodafone… any investor from the UK or anywhere in the world that wants to invest in India needs certainty about tariff and taxes, and does not want a change in between,” said Krishna.
Krishna, the UKIBC’s first Indian CEO, also said resolving the tax disputes will bring an “end to a long saga, which has troubled these companies (Cairn and Vodafone) and not just investment from the UK to India, but from elsewhere too”.
The tax dispute
While the Cairn retro tax dispute involves an amount of almost Rs 11,000 crore, the Vodafone dispute is worth Rs 22,000 crore, which the companies could need to cough up to the Income Tax department.
Both the cases involve the acquisition of shares in Indian companies.
Since coming to power in 2014, the Modi government has maintained it will not go in for more retrospective taxation, a move that was taken by the previous UPA regime. But it never withdrew the cases, which has been a cause of concern for international firms.
Under the UPA regime, then-finance minister Pranab Mukherjee had proposed amending the Income Tax Act, 1961, with retrospective effect, with the aim of allowing the country to retrospectively tax cross-border transactions in which the underlying assets are located in India.
The Cairn dispute is being fought under the UK-India Tax Treaty, and the Vodafone dispute under the India-Netherlands Bilateral Investment Protection Agreement.
The companies have both sought international arbitration. The Cairn dispute is almost over, with the British oil explorer expected to win. The Vodafone proceedings are yet to begin.
Removal of non-tariff barriers
According to Krishna, while India and the UK are engaged in hammering out a free trade agreement (FTA), they will sign a “small trade deal” in the form of a preferential trade agreement (PTA) soon to remove some of the immediate non-tariff barriers.
“All these will eventually lead to a free trade agreement between the two countries… We are looking at the removal of all non-tariff barriers as much as possible, and also to have discussion on the tariff barriers,” he said.
Krishna was referring to a dialogue held on 24 July between Commerce and Industry Minister Piyush Goyal and UK’s International Trade Secretary Liz Truss.
“While we can’t do all, the sectors that have been identified are food and beverages, ICT and healthcare… So, in some of these low-hanging fruits, the closure will happen by way of an agreement,” Krishna said, adding that the UK is also negotiating FTAs with the US, Japan, Australia and New Zealand, among others, as it chalks out a strategy for Brexit.
Also read: Modi has failed to end India’s tax terror