In its 2014 election manifesto, the BJP had attacked the then Congress-led UPA government for unleashing “tax terrorism” and “uncertainty” in the country, which not only “negatively impacts the investment climate”, but also “dents the image of the country”. Six years later, the signals that emanate suggest that rather than ushering in a “non adversarial and conducive tax environment”, the Narendra Modi government is continuing with the highly contentious policies of the UPA government. On Thursday, it was reported that the government has filed an appeal at the Singapore seat of the permanent court of arbitration challenging the judgment in the Vodafone retrospective taxation case. The government’s move comes a day after it lost the arbitration case to Cairn Energy over the retrospective levy of taxes and was asked to pay damages to the tune of $1.2 billion. While the government has said it is studying the award, applying the principle of uniformity of approach suggests that it is likely to appeal the verdict in the Cairn case as well. This would be a mistake, and would send the wrong signal to the investor community. The government should accept the orders, and ensure a proper burial to the issue of retrospective taxation.
The Cairn issue pertains to tax demand on capital gains made by the company in the reorganisation of its business. The Permanent Court of Arbitration (PCA) at The Hague has maintained that the issue was not a tax dispute, but a tax-related investment dispute, and hence it fell under its jurisdiction. The court noted that the demand was in breach of fair treatment under the UK-India bilateral investment treaty. Ironically, the tribunal order also took note of arguments made by BJP leaders on retrospective amendments and international disputes — former finance minister Arun Jaitely had likened them to tax terrorism. In the case of Vodafone, the Singapore seat of the PCA has held that India’s retrospective demand of capital gains and withholding tax from the firm was “in breach of the guarantee of fair and equitable treatment”. In fact, in the Vodafone case, the Supreme Court held in 2012 that Vodafone’s interpretation of the Income Tax Act, 1961 was correct. The then finance minister, Pranab Mukherjee, circumvented the ruling proposing an amendment to the Finance Act, giving the tax department the power to retrospectively tax such deals.
Hoping that domestic courts will overturn the arbitration award would be unwise, and will be treated as a warning by investors. The approach has to be one of compliance with the verdict, rather than finding ways to bypass it. The government must distance itself from the issue of retrospective taxation that has caused much damage to India’s reputation.