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Retrospective taxation is causing more harm to India’s interest than the revenue it could yield. Do you agree? Examine in the light of recent developments.

Topic:  Indian Economy and issues relating to planning, mobilisation of resources, growth, development and employment.

4. Retrospective taxation is causing more harm to India’s interest than the revenue it could yield. Do you agree? Examine in the light of recent developments. (250 words)

Reference: Live Mint

Why the question:

India’s refusal to settle with Carin energy after their recent arbitration award has opened up a prospect of a private company having to legally seize sovereign property globally, a course of action some of shareholders are starting to recommend.

Key Demand of the question:

To write about retrospective taxation which has done more harm than good.

Directive:

Examine – When asked to ‘Examine’, we must look into the topic (content words) in detail, inspect it, investigate it and establish the key facts and issues related to the topic in question. While doing so we should explain why these facts and issues are important and their implications.

Structure of the answer:

Introduction:

Start by defining what constitutes a retrospective tax and its genesis in India.

Body:

Mention about the need for retrospective taxation in India. Talk about the Vodafone and the Cairns case.

Highlight with examples as to how the retrospective taxation has been more damaging than it has helped. Vicious cycle of arbitration and appeals which are ultimately lost, disincentive investor sentiment, a PR failure, fear of Indian tax regime, using retrospective tax as a tool to meet revenue targets, cost of appeals and now the possibility of seizure of sovereign assists globally which will have repercussions etc.

Put forward the opportunities that arise by moving away from retro tax such as formation of a coherent investment strategy, boosted investor confidence,  ease of doing business and harmonious bilateral investment treaties etc.

Conclusion:

State you balanced views on retrospective taxation while underscoring the need of India to respect the decision of arbitrators.