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How India self-inflicted Vodafone & Cairn humiliation over ‘bad idea’ of retrospective tax

In episode 647 of #CutTheClutter, Shekhar Gupta says India must stop digging the hole and rethink its decision to appeal the rulings against retrospective tax.

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New Delhi: On Thursday, oil explorer Cairn Energy won $1.2 billion in damages after an international arbitration tribunal ruled against India in a tax dispute case. The development came three months after a similar ruling in a case over tax avoidance by telecom giant Vodafone.

In episode 647 of ‘Cut The Clutter‘, ThePrint’s Editor-in-Chief Shekhar Gupta discussed retrospective taxation in India in view of the Vodafone and Cairn Energy cases.

According to him, the common highlight to both these cases was that each signified a big defeat for India.

India changed its tax laws retrospectively in 2012, to make them effective from 1962. Using that backdate, India demanded taxation from Vodafone and Cairn Energy, retrospectively, he said. In both cases, these companies challenged the demand in the Permanent Court of Arbitration in The Hague at Netherlands, and the Government of India lost both cases.

He noted that India was challenging the Vodafone ruling in Singapore.

In both these cases, Vodafone earlier and Cairn Energy now, the decision at the Permanent Court of Arbitration, against India had been unanimous.

The panel comprises three members. There is a neutral member and then each party nominates a member. Even the party nominated by India voted against the Government of India, he said.

Moreover, the Government of India had earlier lost the Vodafone case in the Supreme Court, which had said that the government was not justified in claiming this tax from the company. “Once you lose in the highest court of your land, then you should go by that truism — stop digging,” Gupta said.

Also read: Modi govt can make it really easy to do business in India by accepting Vodafone tax loss

‘Penny wise, pound foolish’

What happened at the Permanent Court of Arbitration was that the tribunal did not even get into the retrospective taxation amendment. It said Vodafone invested in India through its subsidiary in the Netherlands. At the time, the Netherlands had a bilateral treaty with India, which lapsed in 2016.

Under the treaty, both countries guaranteed each other fair and equitable treatment and said if a dispute arises, it would have to be settled amicably — arbitration. Thus, it was the bilateral investment treaty that made India lose this case, said Gupta.

Similarly, in the Cairn Energy case, India lost because it had a bilateral investment treaty with Britain, under which the two nations committed to giving each other fair and equitable treatment and in case a dispute arose, it would have to be resolved by an amicable settlement, meaning arbitration.

Thus, the Permanent Court of Arbitration said it saw these tax demands as a violation of the bilateral treaties.

In 2015, the Modi government came up with a new model for bilateral investment treaties, and said it would be cancelling the existing treaties — which is how the treaties with both Britain and the Netherlands lapsed.

Gupta also laid out the specifics of the Vodafone case, discussing what led to the 2012 amendment.

Speaking about the larger picture of foreign investment in India, he said, “Globally, there’s an impression that it’s almost impossible to enforce a contract in India, because the legal process is slow and takes forever.”

He said if a country changes its own law and uses its parliamentary sovereign power to sideline its own Supreme Court, then it delivers a massive blow to the nation’s market value in the world. “And you slip further down in the ranking on enforcement of contracts,” he said.

The entire situation was “penny wise, pound foolish”, he added.

Also read: Why the Mukesh Ambani vs Jeff Bezos fight could be more of a waiting game

‘Bad idea’

Speaking about the Cairn Energy case, he said knowing the way governments work, the Government of India will most likely appeal the decision at The Hague.

However, he asked, “What chances do you have of winning a case when even your own nominee has voted against you?”

Gupta said that it was then finance minister Pranab Mukherjee, later the President of India, who introduced the retrospective taxation amendment.

In his memoir, Mukherjee wrote this about the issue: “Despite the angst my proposal generated at that point of time, and even now, both from within my party and outside, I wonder why every succeeding finance minister in the past five years, has maintained the same stance.”

Gupta said nobody can stop a bad idea whose time has come. And somebody will always make a bad idea worse. This was exhibited as it was implemented for Vodafone and then also used for Cairn Energy as well, he said.

“What India should try and do is to stop digging and try to get out of the hole. And to reassure the world and hopefully start filling up the hole,” he added.

Watch the latest episode of CTC here:

Also read: To understand Vajpayee’s economic worldview, look at his first choice for finance minister


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