Monday, January 30, 2012

Why should the Vodafone Tax Ruling by Supreme Court be cheered

The Vodafone verdict has been welcomed by the industry. But there is a section of people who have raised flags and see this in a negative light. For me the argument is simple. Consider the following:

  1. The government allows deduction of investments of up to Rs 1 lac (One Hundred Thousand) to an individual from one’s taxable income, under section 80C. Thereby providing you a perfectly legal way to avoid paying tax on Rs 1 lac. 
  2. This is fantastic. Government is encouraging you to invest therefore you make investments eligible under this scheme and spent this 30 thousand you saved on taxes (lower TDS) during the year. 
  3. However, next fiscal when you filed your return, the tax man comes knocking on your door and says that the scheme is retrospectively withdrawn, as this was avoidance of tax on 1 lac of income, and avoidance of taxes is to be discouraged. 
  4. How would you feel about this? Is the government justified in doing this?

This is the problem with retrospective changes. Vodafone (and Hutch) made investments though a perfectly legal and allowed way to invest in telecom sector in India. The tax department wants to retrospectively change this and tax these investments. Well frankly they were not even changing the written law.

The Supreme Court has called it correctly. If India wants to be taken seriously, we atleast have to honor our written laws. We have to make the laws clear and transparent and cannot leave them open to interpretation. Invite people in and then trap them. No one likes uncertainty. The judgement is a welcome relief and upholds the letter of the law and is rightly being cheered by the industry.
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