The Modi government’s strategy on appealing against the retrospective tax case against telecom giant Vodafone will be predicated by the outcome of an arbitration initiated against its levy of Rs10,247 crore retrospective tax on the UK’s Cairn Energy plc. An international arbitral tribunal is expected to give a decree shortly on Cairn Energy’s challenge to the government seeking Rs10,247 crore in retrospective taxes. India has 90 days (till 24 December) to challenge the Vodafone award. As international investors watch closely, the government has chosen to take a measured approach. The Vodafone saga will now move into the next stage after an international arbitration court in September ruled that the government seeking Rs22,100 crore in taxes from Vodafone using retrospective legislation was in ‘breach of the guarantee of fair and equitable treatment’ guaranteed under the bilateral investment protection pact between India and the Netherlands. If the arbitration award in the Cairn cases goes against India, the government has to pay the British firm over Rs7,600 crore to reverse the dividend and tax refund it had ceased and shares it sold to recover part of the tax demand. Just like in case of the loss in the high-profile international tax arbitration case against Vodafone, there would be no monetary compensation to be paid, if the award in the Cairn case comes in favour of the government. Sovereign right Officials tracking the development are of the opinion that, if the Cairn arbitration award goes against the government, it will certainly look to appeal against it. And since it cannot choose to appeal against one loss and not the other, the same would set the precedence for the Vodafone case too. In deciding on appeal, the government would ignore former Finance Minister Arun Jaitley’s promise to honour awards in retrospective tax cases. Jaitley had stated on several occasions that the BJP government will not raise any new demand using the retrospective tax legislation and will honour arbitration. The line of appeal in both cases, it is learnt, would be that taxation is not covered under investment protection treaties with various countries and that law on taxation is a sovereign right of the country. Both Vodafone and Cairn had challenged the tax demands under bilateral investment protection treaties. Vodafone had challenged before the arbitration tribunal India’s usage of the then FM Pranab Mukherjee’s 2012 legislation, which gave the government powers to retrospectively tax deals like Vodafone’s $11-billion acquisition of 67 per cent stake in the mobile phone business owned by Hutchinson Whampoa in 2007. It challenged the demand of Rs7,990 crore in capital gains taxes (Rs22,100 crore after including interest and penalty) under the Netherlands-India BIT. The arbitration tribunal in its September award said that India’s “conduct in respect of the imposition” of tax demand on Vodafone “notwithstanding the Supreme Court judgement is in breach of the guarantee of fair and equitable treatment” in the bilateral investment protection treaty. As per the award, the government of India’s liability came to Rs85 crore in legal cost.
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The Vodafone saga will now move into the next stage
