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Manmohan Singh starts reversing a few tax policies of Pranab Mukherjee, while Congress not sure what to say ..




This budget had a big shock for a number of investors in the country, with the budget bringing in a measure to reverse the Supreme Court judgment that exonerated Vodafone from having to pay tax on its purchase of a telecom company. Now, technically, this was not a reversal of the Supreme Court judgment since the judgment did not allow the tax claim of the tax department as the law did not support such a claim; so when Pranab Mukherjee presented the budget with this proposal, he was just enacting a law that provided teeth to the claim by the tax department. Further, there was a lot of worry about the implementation of GAAR measures to detect cases where it was felt that companies were using loopholes to save tax and the income tax department could penalize such use of loopholes. Again, GAAR is in force in around 30 countries around the world, and trying to prevent tax loss is not a bad decision in itself.

However, for an economy that was undergoing a slowdown, where investors were moaning a policy paralysis on the part of the Government, and the stifling of reform measures reduces the interest in investment in the country, it is being totally unrealistic to implement measures that would showcase that the Government will, in addition to not doing reform, will actually increase the power of tax implementation authorities, and in an earlier incarnation, make the tax payer be the one who has to prove that tax avoidance measures were not used. Further, the passage of the law targeting Vodafone was not only meant to fill the gap pointed out by the Supreme Court, but to reverse the judgment, since it passed the law having a retrospective impact. This led to the perception that the sanctity of a judgment by the Supreme Court could be violated by the Government, in its attempt to get more tax. And this was not helped by the Finance Secretary announcing that the penalty on Vodafone would take the total tax demand to Rs. 20,000 crore. This is real money, enough to cause scare issues, especially since it seems that the Prime Minister had assured the British Government that Vodafone would not face a retrospective penalty.
And these measures were not unanimous; there were reports of a large number of economists opposing these tax penalties, and soon stories started about how the Prime Minister was unhappy over these measures, and even more unhappy that he could not do something about these new measures. Pranab Mukherjee was the Finance Minister, and he is a very powerful and influential politician in his own light. It was remarkable, but apparently the Prime Minister had so little power that he could not get the Finance Minister to withdraw some provisions that seemed to be bad for the current condition of the economy. Manmohan Singh had to wait for Pranab Mukherjee to resign for the Presidential election, and then these measures were delayed. And it was unmistakable, since when the Finance Ministry introduced some GAAR guidelines, the PMO promptly denied that these were final or passed by the Prime Minister, who has kept the Finance Ministry with himself.
Manmohan Singh knows that he facing a crisis of huge dimensions, where his legacy is heavily in danger. In addition to his Government being seen as the most corrupt Government ever, the UPA2 is seen to have squandered the advantages of a growing economy and almost led to growth being stalled. This also means that the Government will not have the finances for more populist measures as the Government gets closer to elections, and that will be catastrophic for the Congress party.




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