Lessons from Vodafone case

A certainty in tax laws that are free from harassment will send the right message to foreign investors

AuthorPublished: 29th Sep 2020  12:00 amUpdated: 28th Sep 2020  8:35 pm

With the Hague-based international arbitration tribunal unanimously ruling in favour of the British telecom giant Vodafone in the controversial retrospective tax case, it is time for India to exorcise the ghost and move on. The retrospective demand of Rs 22,100 crore tax on capital gains was largely seen as an instance of tax terrorism and did a lot of damage to the country’s image as an emerging economic power. The 13-year-long legal battle ended with the tribunal ruling that India’s insistence on taxation under a retrospective legislation was in clear breach of the ‘fair and equitable treatment’ protections provided under the bilateral investment treaty between India and the Netherlands. The verdict 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 serious efforts are being made to woo foreign investments into the country. Instead of appealing for a review of the tribunal’s decision, the NDA government must honour the award and bury the controversy. India needs to project an investor-friendly image to attract foreign investments in these dire times. A certainty in tax laws that are free from harassment is a good place to start. Though the blame for the mess created by the 2012 retrospective tax amendment belongs to the previous UPA regime, the present dispensation had six long years to end the dispute and send the right message to the investors. In fact, ending the “tax terror” was one of the key poll promises of the NDA.

The Vodafone case illustrated how policy hurdles come in the way of doing business in India, despite the tall talk of liberalisation and simplification of procedures. What was more appalling was that when the retrospective tax was introduced, then Finance Minister Pranab Mukherjee never even made a mention of such a momentous change in his Budget speech. 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. Vodafone’s troubles started in 2007 soon after it bought a 67% stake in Hutchison Whampoa for $11 billion, including the mobile telephony business and other assets of Hutchison in India. The government raised a demand of Rs 7,990 crore in capital gains, saying the company should have deducted the tax at source before making payment to Hutchison. Vodafone challenged the demand notice in the Bombay High Court, which ruled in favour of the Income Tax Department but the Supreme Court later ruled in company’s favour in 2012. What followed was the infamous retrospective taxation policy pushed by the Finance Ministry that empowered the Income Tax Department to retrospectively tax such deals.

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