Retroactive Taxes

Jun 28, 2020

During a visit to Rashtrapati Bhavan with a TiE delegation several years ago I was surprized to hear President Pranab Mukherjea wax poetic about entrepreneurial revolution underway in India. A lifelong socialist, he was finance minsiter several times and had a reputation for being very anti-business. As a matter of fact, he was the man behind the bank nationalization in the early days of Mrs. Gandhi.

I was present at the National Press Club meeting in Washington DC in 2004/2005 when he was asked about the retroactive change of tax laws to go after Vodafone after Supreme Court of India had ruled against the Government. He was asked why would anybody invest in India if the rules of the games can be changed retroactively, especially after the investment has been made? He got visibily upset, his face turned red, his voice quivered and he said that India would rather do without FDI. We would eat lizards before we bowed to international investors. We are not a colony any more, he added. It was strange coming from the Finance Minister who was in Washington looking for FDI.

At the meeting at Rashtrapati Bhavan, I asked him about it. Why was it necessary to change laws retroactively? He told us that he was told by his beurocrats that it was a 75,000 Crore decision if the law was not amended. So how much was collected in additional taxes? Zilch, he said. Was he sorry? Yes, he was very sorry. He went on to say that now he understands more about the entrepreneurs and wealth and job creation.

This is the tragedy of India. All the socialist politicians talk about being pro-people while enacting anti-people laws. After the Vodaphone decision, FDI dropped almost 90%. It was a decade before it started to recover.

Taxes uber alles

Jun 23, 2020

https://economictimes.indiatimes.com/news/economy/policy/pe-firm-used-mauritius-entity-to-avoid-tax-on-rs-14500-crore-made-from-flipkart-walmart-deal/articleshow/76457795.cms#:~:text=The%20Authority%20of%20Advance%20Ruling,of%20Flipkart%20stake%20to%20Walmart.

Very discouraging to see this headline in a respected business newspaper like ET. If that’s how they charcaterized it, I wonder how the popular press sees it. India-Mauritius Double Tax Avoindance Treaty is/was a bonafide deal. It was a legitimate way to invest in India, otherwise why would India have the treaty? Indian Tax authorities are random, capricious and arbitrary. It is taxes uber alles! Jobs and wealth creation be damned.
Indian startup ecosystem has been a bottomless pit for investors. Flipkart has been held out as a spectacular exit for the investors. It has been the only one and it too was a strange one, a money losing company was acquired by a laggard Walmart, who did not want to lose out to Amazon in a potentially large market. With post deal rules change by GOI, it is starting to look like a poisoned chalice for Walmart too.
Now tax authorities want to partake in the gains of investors, even though they have no real legal basis. Mauritius Treaty was put under cloud when the Indian authorities started to talk needing a presence of substance for investors in Mauritius without ever defining what that really meant.
VC investors are long term investors in high risk startups. Most of startups fail and investors lose their full investments often. They depend on occasional hits for their returns. It is imperartive that rules of the game are clear and stable; and respected by tax authorities. It is just a matter of time VC investors will tire of India, as FDI investors in manufacturing already have.

Nationalized Temple

Jun 14, 2020

I heard this story several years ago. I am not sure if it is real or a made up but does sound plausible.

A temple in south India was nationalized several years ago because of mismanagement. An IAS officer was appointed to straighten it out. He developed a detailed policy and implemented. Soon there was an uproar as no body was being allowed in the temple.

An enquiry was instituted to find out as to what had happened. It was soon discovered that the guard at the temple was not letting any body in. He was hauled in front of the inquiry commission.

Why are you not letting any body in? I am just following the instructions.

What instructions? I am asking to them to take their shoes off at the door as required by the rules.

So what is the problem? None of them has shoes on, so they can not take them of as required by the rules.

I am asking them to go back and put on shoes so they can take them off at the temple door as required by the policy.

Round Tripping

Jun 8, 2020

Concept of round tripping is beyond me. It is like closing the barn door after the cows have left. It is only hindering legitimate business.

The idea that preventing round-tripping of money is a way to prevent conversion of black money into white money is a laughable one. So how does one know which money is roundtripping in the first place? Simple, presume all inbound investments/donations are are round-trippers and put the monkey on their back to prove that they are not doing it. It is asking one to prove a negative!

Indians are now allowed to invest overseas legally, but not into funds that also invest in India, as that investment is tagged as a round tripper. Most of the VC Funds raise money from investors all over the world, including from India. Once, even one Indian invests in the fund, the fund becomes ineligible to invest in India.

The effort should focus on the formation of the black money in the first place. Problem is that people who are sharp enough and bold enough to deal in black money do not normally use regular banking channels for their transactions. Their transactions are not easily traceable. Most formation of black money is done by people in cahoots with people in power. They cover their bases well.

India has not proven to be a lucrative place invest for VCs. With government focused on taxes only, it is fast becoming not worth the bother.