The double whammy suffered by India, following the humiliating adverse verdicts handed out by the international arbitration tribunals in Vodafone and Cairn cases, must serve as a lesson for the country’s tax regime. Retrospective taxation is not only arbitrary, regressive and bad in law but will also erode investor confidence and undermine the country’s image. A smooth, transparent and predictable tax regime is what is needed for any country to attract foreign investments. The aftershocks of the retrospective taxation, introduced by then Finance Minister Pranab Mukherjee in 2012 as an amendment to the Income Tax Act, are still being felt. It was a costly policy misadventure. The latest order by the Permanent Court of Arbitration at The Hague invalidating India’s $2.74 billion tax claim on Cairn Energy Plc has again proved this. The tribunal also ordered India to pay Rs 8,000 crore as damages to the UK oil major. This comes close on the heels of a similar setback that the country received three months ago in the Vodafone case. The defeat in the twin cases underscores the need to do away with retrospective taxation. India changed its tax laws retrospectively in 2012, to make them effective from 1962. Using that backdate, it demanded taxation from Vodafone and Cairn Energy retrospectively. In both cases, these companies challenged the demand in the Permanent Court of Arbitration in The Hague at the Netherlands and India lost both cases. The Vodafone case was also lost in the Supreme Court which had said that the government was not justified in claiming the tax from the company.
Retrospective taxation is a violation of the bilateral treaties that India had signed with the Netherlands and Britain. If a country changes its tax laws to make them applicable retrospectively and uses its parliamentary sovereign power to sideline its own Supreme Court, then it will send wrong signals to the global market and potential investors. An impression will gain ground that India is unsuitable for investments with arbitrary policies, slow legal process and uncooperative bureaucracy. The Vodafone and Cairn cases illustrate how policy hurdles come in the way of doing business in India, despite the tall talk of liberalisation and simplification of procedures. Though the BJP campaigned against the UPA’s ‘tax-terror’, it did nothing to strike the retrospective tax from the statute when it came to power. The tribunal verdicts must serve as a salutary lesson that the faith of foreign investors in India’s commitment to international treaties should not be undermined, especially at a time when efforts are being made to woo them. Instead of appealing for a review, the NDA government must honour the awards and bury the controversy.
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