A court battle between the taxman and a multinational company is a struggle that some people would wish had no winner. But the adversarial system demands a result even in the longest running contests — and in India most of these are long-running.
(Royal Dutch) Shell’s victory in the Bombay High Court relates to $3 billion of tax claims on transactions back in 2008 and 2009. (On Tuesday, the Bombay High Court ruled in favour of the Anglo-Dutch energy group over allegations that it had underpriced shares issued by Shell’s Indian subsidiary to its parent — a charge the company had attacked as “baseless”. Shell’s case involved two years worth of tax claims in 2008 and 2009, in which India’s authorities alleged the group had incorrectly assessed the amount it owed relating to certain share transfers. The authorities said Shell owed $3 billion in tax on these stock transactions.)
The decision also follows a similar ruling in favour of Vodafone last month, when the British telecoms group won a case relating to what is known as transfer pricing, or the valuation of financial transfers between different parts of international companies.
The Royal Dutch Shell ruling has duly been welcomed by the energy group and sundry Indian business organisations. It will deserve a heartier round of applause only if the Indian government decides to let the judgement stand and not appeal against it to the supreme court.
This is not a cosmetic matter of not being branded a sore loser. Rather it is the need to bring greater stability into a tax system that has become known for being aggressive, selective and — most damagingly — retrospective. All by itself, the $2.6 billion tax imposed after the event on Vodafone’s $10.9 billion acquisition of Hutchison Essar in 2007 has acted as a deterrent to overseas companies considering deals.
As Asia’s third-largest economy, India has powerful attractions for international groups, particularly as some other emerging markets become less appealing. But long-term investment requires confidence that the business environment will be predictable at the very least. And that is what is currently lacking.
Some of the Indian government’s tax troubles do not lend themselves to easy solutions. Many countries, including the UK, are grappling with how to find the balance between encouraging foreign groups to operate within their borders and taking the right-sized chunk of that company’s earnings.
Such difficulties strengthen the case for Narendra Modi’s administration to accept the Shell ruling. The more that serious reform of tax law seems too ambitious, the more the government should take this smaller step forward.
— Financial Times
