The UPA government’s decision in 2012 to change the Income Tax Act with retrospective effect was one of the most controversial taxation moves in recent times. Former finance minister Pranab Mukherjee, who later rose to become President of India, was at the centre of this financial storm. The amendment was branded regressive and it was feared that the move would make India less attractive to foreign investors.
Manmohan Singh, who was then prime Minister, thought so, as did his cabinet colleagues like P. Chidambaram and Kapil Sibal. In his book The Coalition Years 1996-2012, Pranab revealed that even Sonia Gandhi, the then all -powerful chairperson of UPA, too had reservations about the move. Even now, everybody agrees that this was the worst of Pranab’s legacy. Yet it is a sad reminder of how one man’s heft mattered so much in a regime that ruled the country for ten long years. And how the country suffered because of a bad idea which got into the 2012-13 budget.
The decision hurt business confidence hard, scaring off investors in the process, and contributed to the undermining of the image of UPA-2. Last fortnight, the Permanent Court of Arbitration at The Hague ruled in favour of Vódafone, the target of Pranab’s miscalculation, that India’s retrospective demand of Rs22,100 crore as capital gains and withholding tax imposed on the British telecommunication company for a 2007 deal was “in breach of the guarantee of fair and equitable treatment”.
In its ruling, the arbitration tribunal also said that India must now stop efforts to recover the said taxes from Vodafone. This is a serious embarrassment for India which could have been avoided.
India is entangled in more than a dozen international arbitration cases against companies, including Cairn Energy, over retrospective tax claims and cancellation of contracts. In the case of Cairn Energy, the government in 2014 (again UPA) used the retrospective tax clause to seek Rs10,247 crore from British oil explorer over a 2006 reorganisation of its Indian businesses. The recent judgment should now serve as a wake-up call.
Instead of poring over the verdict and deploying legal counsels “to seek suitable legal remedies at appropriate forums," the Modi government should abide by the arbitration award and cough up the Rs75-crore liability. In fact, it should withdraw from all the tax arbitration currently cases going on. This will send a stronger signal to investors the world over than some of the recent government announcements to garner FDI. The sooner an end is put to this sorry episode in India’s taxation history, the better it will be.
The important lesson to be learnt from the verdict is that our bureaucrats should not be given a free hand. One of the major factors for the Court of Arbitration to rule in favour of Vodafone was the violation of the Bilateral lnvestment Treaty and the United Nations Commission on International Trade Law. In 2014, when the Vodafone Group had initiated arbitration against India at the Court of Arbitration, it had done so under Article 9 of the BIT between India and the Netherlands. Article 9 of the BIT says that any dispute between “an investor of one contracting party and the other contracting party in connection with an investment in the territory of the other contracting party” shall as far as possible be settled amicably through negotiations.
The other was Article 3 of the arbitration rules of UNCITRAL, which, among other things, says that “constitution of the arbitral tribunal shall not be hindered by any controversy with respect to the sufficiency of the notice of arbitration, which shall be finally resolved by the arbitral tribunal”. Weren’t our bureaucrats who merrily led our netas up the garden path aware of the international laws guiding trade and investment?
After Pranab was elevated to the Rashtrapati Bhawan, successive finance ministers like Chidambaram (2012-14) and Arun Jaitley (post-2014) did not bother to repeal it and undo the damage – a fact trumpeted by Pranab in his book in 2017. This showed how our FMs, no matter how glib they may sound and intelligent they may appear to the public, are guided by finance ministry bureaucrats.
In this case, it was the babus manning the department of revenue who successfully sold the line that while as per our country’s tax laws, if you pay tax in one country, you need not pay tax in the other country of your business operation which is covered by the Double Tax Avoidance Agreement, it cannot be a case that you pay no tax at all. This had also been Pranab’s argument all along. A specious argument, as it now turns out.