What is the connection between a leading car manufacturer and a telecom player? Both have faced the wrath of tax authorities — the former in a customs duty classification matter and the other in a capital gains tax matter.
The Vodafone case which hogged the limelight between 2007 and 2012 was a tax demand that was fought up to the Supreme Court. The case was won by the telecom major only to provoke a retrospective amendment to the law.
The Volkswagen case is now being fought at the Bombay High Court through a writ petition. The crux of the issue relates to the classification of imports — The stand of the company is that the “individual parts” approach which attracts 5-15 per cent duty is the correct legal position.
The stand of the Customs authorities is that the imports fall under the “Completely knocked down” (CKD) category attracting 30-35 per cent duty. The demand in question is around ₹12,000 crore. The focus of this article is not to deep dive into the merits of the classification as also the period of limitation argued in the court but to deliberate on how corporate boards — both India and global— are to deal with complicated tax positions and staggering tax demands.
Shift in approach
Earlier, boards were wary of taking aggressive tax positions and as a matter of procedure ensured that the best legal opinions were obtained more as an insurance policy. The second line of defence was to pay the tax (if possible) and largely mitigate the interest and penalty impact arising from such demands.
Discussions were centred around possible impact on the financials and disclosing the same as contingent liabilities and so on. Times have changed and so have approaches of corporate boards in dealing with tax complexities.
Today the gears have shifted to “tax adventurism” vs “tax conservatism”, or “ Tax avoidance” vs “Tax planning” of yesteryear. Cautious companies come under the latter category of “tax conservatism” and ensure that the tax provision is around the safety zone of 25-30 per cent of the pre tax profits.
The ones which take the adventurous route evaluate the issue more from a treasury and cash preservation perspective than a pure tax interpretation matter. In the case of Volkswagen one is sure that the Boards, India and global, would have discussed threadbare various scenarios including the worst case scenario before taking the “individual parts” position as against CKD position.
This brings us back to the crucial question: Should Boards just be guided by the letter of law approach in looking at legal opinions or go beyond this and decide what is in the best long-term interests of the company?
Cases like Volkswagen will keep coming in regular intervals. The risk mitigation strategies of the board will be called into question by all stakeholders since the magnitude of the demands raised can wipe out several balance sheets. There are no two opinions that the buck stops with the Board, irrespective of the number of legal opinions taken for record.
The responsibility of the board is more onerous if the issue goes beyond interpretation of the law to one of misleading the tax authorities and concealment of particulars. Irrespective of the final outcome of the Volkswagen case it is time that a Board-approved tax approach policy along with a risk matrix is prepared and adopted, generally speaking.
Way forward
As the economy reaches the $5-trillion mark it is imperative that the government sets up an institutional arbitration system to deal with high voltage tax demands to assure global investors of our sincerity in improving the ease of doing business in India.
It is time that we free the courts from dealing constantly with matters which begin with period of limitation test and take their own time to come to the merits of the matter.
The writer is a Chartered Accountant