The world of physics has several immutable laws but the Government of India has a fascinating ability to disregard them. Adhering to them, however, would help it not only shore up business confidence but also secure the finances of the people.
Let’s look at time travel first. Stephen Hawking once famously remarked that the proof that time travel does not exist is that we are not currently inundated by tourists from the future. It seems he didn’t factor in the Indian taxman, who is increasingly frequently jumping back in time to raise current revenues.
This, of course, has to do with the government’s repeated attempts at retrospective changes to tax laws.
It earned a lot of plaudits in 2021 for doing away with the infamous retrospective tax provision brought in by then Finance Minister Pranab Mukherjee in 2012. But since then, the Narendra Modi government has ploughed ahead with several fresh retrospective demands of its own—one of which has been aided by the Supreme Court.
The most recent of these is the Supreme Court’s 14 August ruling saying that states could levy tax on mining companies with retrospective effect from April 2005 onwards. While this will entail a bounty for state governments like Odisha, it will also impose a massive burden—estimated at about Rs 2 lakh crore—on mining companies.
Apart from the fiscal impact and the dent to business prospects, what’s more important is this spectre of retrospective taxation. Rather than laying it to rest, authorities in India are empowering it, ignoring the consequent damage it will have on the already lacklustre business confidence in the country.
Similarly, the Budget 2024 proposal to do away with the indexation benefit for real estate long-term capital gains arising from sales after 2001 was another such retrospective move. After very loud backlash, the government rolled this back, removing indexation for sales after 23 July 2024, but the damage to perception has already been done.
If it weren’t for the protests from its supporters and critics alike, this retrospective amendment would have remained in place. Something similar was done with debentures in last year’s Budget, but since there was no protest, the retrospective provision has continued.
The Income Tax Department already has the reputation of going back in time to raise tax notices for filings done years, if not decades, ago. Seeking to change other tax rules to remove benefits with retrospective effect only reinforces this perception.
Tax uncertainty is an infirmity that has long plagued India’s governance structure, but there’s no attempt being made to cure this illness.
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‘External forces’
Now we come to Newton’s First Law of Motion. According to it, any object at rest or in motion remains in that state unless acted upon by an external force. With India’s governance, we are more concerned by the ‘at rest’ part of this law than the ‘at motion’ part. After all, it’s nobody’s argument that the Indian government is doing too much and must pause.
Rather, what’s happening in several cases is that the Indian government and, to an extent, the state governments are remaining at rest even when acted upon by significant external forces. And this is when movement would have several positive effects on India’s business environment and would also protect its citizens.
One notable example of this is crypto regulation. Yes, the government spearheaded the attempt in the G20 meetings it hosted to come up with an internationally agreed and applicable framework for the regulation of crypto assets. It has also said it will come up with its own regulations in line with the global standard.
But since then, a few ‘external forces’ have taken place that have made such rules much more urgent. Take what happened at the crypto exchange WazirX, for example. In one fell swoop, Indian investors in cryptocurrencies saw upwards of $230 million of their assets vanish due to a hack.
After this, WazirX proposed a preposterous ‘loss socialisation’ solution, where it would spread the loss over all its customers rather than confine it to those whose accounts were compromised. That is, it would take crypto assets from those who didn’t face theft and distribute them among those who did.
It has since backtracked somewhat on this, saying it was just one option it was considering, but at no point has it ruled it out either. This is where the Indian regulator needs to urgently step in. It’s only through formal regulation that the Indian public can be protected against such one-sided actions by crypto exchanges.
But it looks like the government remains at rest, even though substantial external force is applied.
Another instance where this is the case has to do with the taxation on e-gaming services—which also has a retrospective component, by the way. The issue is currently sub-judice in the Supreme Court, but the crux of the matter is whether the GST Council can impose taxes on e-gaming companies with retrospective effect or not.
Budget 2024 brought in a provision—agreed upon during a preceding GST Council meeting—that allows the central and state governments to waive this retrospective tax amount if they feel it is right to do so. So far, however, no such decision has been taken by either the Centre or any of the states.
This inaction has three impacts, according to industry experts: smaller e-gaming companies are beginning to operate in the grey market to avoid taxes, several bigger ones are moving out of the country, and international companies previously looking optimistically at India are now pausing their plans to enter the market.
There’s a lot the government can learn from the world of physics. First, don’t try jumping back in time. The costs are higher than the reward. Second, don’t let inertia rule your actions, especially when acting quickly can bring security not just to companies but also to India’s citizenry.
TCA Sharad Raghavan is Deputy Editor – Economy at ThePrint. He tweets @SharadRaghavan. Views are personal.
(Edited by Theres Sudeep)