Arindam Chaudhuri is Delhi franchise holder for i1 Super Series
In less than three years India has seen some notable multi-billion tax evasion cases. While the archaic tax laws are helping MNCs to indulge in tax evasion and walk out without any hassle, the government still lacks the desired motivation to bring in the most required radical changes to hit back hard at them.
A large section of the country got shocked in August 2009, when Minister of State for Finance S S Palanimanickam in a communiqué disclosed the amount that country’s top 100 tax defaulters owed to the exchequer. Cumulatively the amount stood at a mind-boggling Rs 1.41 lakh crore – over three times the amount that the government spends every year on National Rural Employment Guarantee scheme. But then it was just the list of people who defaulted their payments in a country where the largest segment believes that tax evasion is their birth right, be it legally or illegally. And the latest name that has surfaced in this regard is US-based confectionery giant Kraft Foods.
It all started when a Delhi-based law firm acted as whistleblower and filed a public interest lawsuit late last year citing irregularities in terms of tax liabilities related to sale of shares and other assets in the event of Kraft’s $19 billion acquisition of Cadbury. While the law firm, Kanth & Associates asserts that it is a clear case of tax evasion resulting into substantial loss to the economy, Kraft is yet to speak on the issue. In the meantime, a letter written by Salil Mishra, Under Secretary, Ministry of Finance, to Gaurang Kanth, Managing Partner, Kanth & Associates, indicates that “action has been initiated in the matter under the Income Tax laws”. However, irrespective of the outcome of the investigation and the long legal battle to follow, the fact that cannot be ignored is that the company managed to escape the eyes of the tax department without any hitch.
But then, this is not the first of its kind in India. Vodafone has already become a case study in this regard being found liable to the Indian exchequer for nearly $2 billion in capital gain taxes related to its $11 billion takeover of Hutschison Essar in 2007. So the question remains, how does these MNCs manage to skip the eyes of law causing a loss to the exchequer? Focussing on the backdrop in discussion – acquisition and capital gain taxes – Gaurang Kanth answers, “India lacks a strong legal framework in this context. For example, while other key countries (even China) have a franchisee law in place, India has no specific legislation to regulate franchisee arrangement in the country... and on most occasions such regulatory gaps end up helping these companies to evade tax.”
Though Vodafone and Cadbury are two multi-billion dollar cases related to takeovers, there are numerous other examples of tax evasion by MNCs operating in India under various other clauses. In 2008, soft drink major Coca Cola and German airline Lufthansa were slapped with demand notice from the Anti Evasion Wing of the Commissionerate of Service Tax. While Coke was said have to evaded Rs 8.55 crore in terms of service tax on the out of pocket expenses (expenses over and above the contract amount), Lufthansa was given a ticket of Rs 6.16 crore for allegedly evading service tax on full value of the fare it received. For that matter Nokia, the largest mobile handset player in India, had faced a penalty of Rs 1.14 crore in 2006 for furnishing inaccurate income particulars in financial year 2001-02 with an intention to avoid income tax. Going by experts, the number of cases where companies get caught and pay penalty is just the tip of an iceberg if we consider the number of companies that evade tax and move on without getting caught.
Adding another view point to how the MNCs manage to escape Indian taxmen, Dheeraj Malhotra, Director, MPartners, says, “They (MNCs) are deriving benefit from the mismatch between domestic legislation and sovereign treaties and taking advantage from the fact that treaties take precedence over law and exempt non-Indian source income of residents of certain jurisdictions from Indian taxation. Each transaction that has hit the limelight has been structured within such a framework.” To avoid such a scenario, the best way forward, perhaps, would be a proactive legislature that assists the revenue department and closes such loopholes to address these issues in the correct way.
However, the root cause of all these problems is the complex and archaic tax laws prevailing in the country. Irony is that time and again global companies have blamed these laws as a deterrent, yet they have used them beautifully to pocket more bucks by avoiding tax. Though Finance Minister Pranab Mukherjee has been promising radical reforms in tax laws, simplification of laws related to M&As and stricter norms related to compliance, it just doesn't seem to take off. What can be a better example than the New Direct Tax Code that is now expected to be implemented from April 1, 2012 despite Finance Minister’s high hopes at Pravasi Bhartiya Divas, 2010 where he had said, “We are working on tax reforms. I am hopeful that the Direct Taxes Code will be implemented from April 2011.” Thus, it’s not only the laws that needs to be changed. If the government wants to check the number of corporte tax evasion cases, the system as such needs to go through a complete overhaul with radical changes infused at all steps, be it the laws, or the execution of it. And that can only be possible if ample support can be mustered from both the lawmakers and the executives. Else, while India will continue to struggle with widening deficits, MNCs will continue to be rich with window dressed profits.
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In less than three years India has seen some notable multi-billion tax evasion cases. While the archaic tax laws are helping MNCs to indulge in tax evasion and walk out without any hassle, the government still lacks the desired motivation to bring in the most required radical changes to hit back hard at them.
A large section of the country got shocked in August 2009, when Minister of State for Finance S S Palanimanickam in a communiqué disclosed the amount that country’s top 100 tax defaulters owed to the exchequer. Cumulatively the amount stood at a mind-boggling Rs 1.41 lakh crore – over three times the amount that the government spends every year on National Rural Employment Guarantee scheme. But then it was just the list of people who defaulted their payments in a country where the largest segment believes that tax evasion is their birth right, be it legally or illegally. And the latest name that has surfaced in this regard is US-based confectionery giant Kraft Foods.
It all started when a Delhi-based law firm acted as whistleblower and filed a public interest lawsuit late last year citing irregularities in terms of tax liabilities related to sale of shares and other assets in the event of Kraft’s $19 billion acquisition of Cadbury. While the law firm, Kanth & Associates asserts that it is a clear case of tax evasion resulting into substantial loss to the economy, Kraft is yet to speak on the issue. In the meantime, a letter written by Salil Mishra, Under Secretary, Ministry of Finance, to Gaurang Kanth, Managing Partner, Kanth & Associates, indicates that “action has been initiated in the matter under the Income Tax laws”. However, irrespective of the outcome of the investigation and the long legal battle to follow, the fact that cannot be ignored is that the company managed to escape the eyes of the tax department without any hitch.
But then, this is not the first of its kind in India. Vodafone has already become a case study in this regard being found liable to the Indian exchequer for nearly $2 billion in capital gain taxes related to its $11 billion takeover of Hutschison Essar in 2007. So the question remains, how does these MNCs manage to skip the eyes of law causing a loss to the exchequer? Focussing on the backdrop in discussion – acquisition and capital gain taxes – Gaurang Kanth answers, “India lacks a strong legal framework in this context. For example, while other key countries (even China) have a franchisee law in place, India has no specific legislation to regulate franchisee arrangement in the country... and on most occasions such regulatory gaps end up helping these companies to evade tax.”
Though Vodafone and Cadbury are two multi-billion dollar cases related to takeovers, there are numerous other examples of tax evasion by MNCs operating in India under various other clauses. In 2008, soft drink major Coca Cola and German airline Lufthansa were slapped with demand notice from the Anti Evasion Wing of the Commissionerate of Service Tax. While Coke was said have to evaded Rs 8.55 crore in terms of service tax on the out of pocket expenses (expenses over and above the contract amount), Lufthansa was given a ticket of Rs 6.16 crore for allegedly evading service tax on full value of the fare it received. For that matter Nokia, the largest mobile handset player in India, had faced a penalty of Rs 1.14 crore in 2006 for furnishing inaccurate income particulars in financial year 2001-02 with an intention to avoid income tax. Going by experts, the number of cases where companies get caught and pay penalty is just the tip of an iceberg if we consider the number of companies that evade tax and move on without getting caught.
Adding another view point to how the MNCs manage to escape Indian taxmen, Dheeraj Malhotra, Director, MPartners, says, “They (MNCs) are deriving benefit from the mismatch between domestic legislation and sovereign treaties and taking advantage from the fact that treaties take precedence over law and exempt non-Indian source income of residents of certain jurisdictions from Indian taxation. Each transaction that has hit the limelight has been structured within such a framework.” To avoid such a scenario, the best way forward, perhaps, would be a proactive legislature that assists the revenue department and closes such loopholes to address these issues in the correct way.
However, the root cause of all these problems is the complex and archaic tax laws prevailing in the country. Irony is that time and again global companies have blamed these laws as a deterrent, yet they have used them beautifully to pocket more bucks by avoiding tax. Though Finance Minister Pranab Mukherjee has been promising radical reforms in tax laws, simplification of laws related to M&As and stricter norms related to compliance, it just doesn't seem to take off. What can be a better example than the New Direct Tax Code that is now expected to be implemented from April 1, 2012 despite Finance Minister’s high hopes at Pravasi Bhartiya Divas, 2010 where he had said, “We are working on tax reforms. I am hopeful that the Direct Taxes Code will be implemented from April 2011.” Thus, it’s not only the laws that needs to be changed. If the government wants to check the number of corporte tax evasion cases, the system as such needs to go through a complete overhaul with radical changes infused at all steps, be it the laws, or the execution of it. And that can only be possible if ample support can be mustered from both the lawmakers and the executives. Else, while India will continue to struggle with widening deficits, MNCs will continue to be rich with window dressed profits.
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM ranks No 1 in International Exposure in the 'Third Mail Today B-School Survey'
Management Guru Arindam Chaudhuri Dean Business School IIPM
IIPM Excom Prof Rajita Chaudhuri
IIPM: What is E-PAT?
"Thorns to Competition" amongst the top 10 best sellers of the week.
IIPM RANKED NO.1 in MAIL TODAY B-SCHOOL RANKINGS
IIPM Mumbai Campus
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