After pussyfooting for seven years and damaging its international reputation, India’s government has finally taken a decisive step toward ending “tax terror,” fulfilling a pledge it had made during the 2014 campaign that first brought Prime Minister Narendra Modi to power. Is this a fresh start, the beginning of an open, predictable, and fair relationship between New Delhi and global capital? It’ll require a lot more evidence to answer that question in the affirmative.
The finance ministry has moved a bill in parliament to scrap retrospective taxation. Introduced in 2012 by the previous Congress Party-led coalition government, the draconian overreach empowered the exchequer to go back 50 years and slap capital gains levies wherever ownership had changed hands overseas but business assets were in India.
Vodafone Group Plc was sent a 200 billion-rupee ($2.7 billion) bill for buying, in 2007, a Cayman Islands-based investment firm that controlled Hong Kong tycoon Li Ka-shing’s Indian wireless business. India’s own Supreme Court had held the deal to be beyond the pale of domestic taxation. The Congress government, which by then was facing a major scandal over telecom licenses, lashed out and went after the British operator by changing the tax code retrospectively.
Revenue officials lost no time in rolling their juggernaut down the newly paved path to perdition. Cairn Energy Plc was hauled up for a restructuring whereby the U.K. energy explorer had transferred ownership of its Indian oil field in 2006 to Cairn India Ltd. to prepare for the local unit’s initial public offering. The $4.3 billion tax demand came in March 2015. By that time the government in New Delhi had changed, but not — as it would become clear later — the statist mindset.
Embarrassment ensued. Last Christmas, the Edinburgh-based firm won a $1.2 billion international arbitration award to restore the losses it suffered after India seized its shares in Vedanta Ltd. (with which Cairn had merged the Rajasthan oil field, India’s biggest onshore discovery in two decades), kept the dividends and sold the stock. Vodafone had won its victory earlier, when a panel in The Hague threw out the tax demand, finding it to be in breach of fair treatment under India’s investment protection pact with the Netherlands, and awarded costs to the telco.
If retrospective taxation dented India’s image, the stubborn refusal to accept arbitration awards tarnished it further. Cairn is seeking enforcement action against Indian sovereign assets from New York to Paris, putting a major future power in the same league as Venezuela, Qatar, Lithuania and Tunisia. It remains to be seen if the passage of the tax amendment bill will lead to a fair settlement of Cairn’s claims. A 26% one-day surge in the firm’s London-traded shares suggests that investors are optimistic.
Vodafone’s fortunes in India, though, have dwindled. The tax overhang and the price war unleashed by petrochemicals czar Mukesh Ambani’s 2016 telecom entry frustrated the local unit’s plans to go public. It merged with metals magnate Kumar Mangalam Birla’s wireless service in 2018, but found itself once again on the wrong side of the state. This time, the government brandished a court-blessed $7.8 billion demand as its share of past revenue from Vodafone Idea Ltd. With $30 billion of debt, the telco is teetering on the precipice. Should the service provider to 280 million subscribers go under, India would earn yet more bad rep by being seen as the world’s most treacherous telecom market.
Cairn can expect to see real money from the scrapping of retrospective taxation, but not Vodafone. Unless there’s a solution to the existential challenge facing its Indian unit, Chief Executive Officer Nick Read would be unlikely to provide meaningful rescue capital. To that extent, the finance ministry’s belated move to unwind the previous government’s mistake becomes a damage-control PR tool: “Look, we did our best.”
Did they? Retrospective taxes are just one facet of arbitrary state action. Multinationals that have committed billions of dollars, drawn by the potential of India’s 1.4 billion-people market, have many other legal minefields awaiting them. Walmart Inc. is battling a draft consumer protection regulation that threatens to undermine the business model of Flipkart, the local e-commerce site it bought for $16 billion in 2018. Facebook Inc.’s WhatsApp service has taken the Indian government to court over rules that it says will destroy end-to-end message encryption.
From fintech and online gaming to ride-hailing and after-school tutoring, Beijing is taking much harsher steps to bend the private sector to its will. But in India, the state seems to be targeting global firms, reducing competition and turning the economy into a monopoly board for local capitalists. Telecom is about to become a two-horse race, led by Ambani. One firm, Adani Airport Holdings Ltd., now accounts for 25% of all passenger traffic and 33% of air cargo. Mastercard Inc. has been barred from taking new customers for alleged noncompliance with data localization rules, handing over the market to Visa Inc. and RuPay, a local network that state-run banks have been asked to promote.
Had the Modi government scrapped retrospective taxation after taking power in 2014, it would have been enough to signal India’s intentions to keep the economy open, transparent and rules-based. Now it will take a lot more work. Some of it might be done by the judiciary, like the Indian Supreme Court’s decision Friday to allow enforcement of a Singapore arbitration order in India, giving major relief to Amazon.com Inc. The emergency arbitrator had, on Amazon’s plea, halted the $3.4 billion sale of cash-strapped Indian retailer Future Retail Ltd. to Ambani’s Reliance Industries Ltd.
But the political executive will also need to strive for a fairer playing field. Getting rid of retrospective taxation is a welcome first step.—Bloomberg