Editorial

Vodafone ruling gives government a chance to clear the air

| Updated on September 28, 2020 Published on September 27, 2020

The government should go the whole hog and scrap the retrospective powers under Section 9 through an amendment to the Income Tax Act as that alone will send a clear signal to foreign investors

Last week’s ruling by an arbitration tribunal in The Hague in favour of telecom giant Vodafone, in its long-standing tax dispute with the government, presents an opportunity for policymakers to send out a clear signal of departure from the regressive tax policies of the past. The case related to Vodafone’s $11-billion acquisition in 2007 of Hutchison Essar’s assets in India routed through a Cayman Islands-based entity, which, to tax authorities, seemed structured as a tax avoidance transaction. The then government slapped a $2.2-billion tax notice on Vodafone, the buyer, for not deducting tax, but the company’s challenge was subsequently upheld by the Supreme Court in January 2012. Not one to be cowed down, the then Finance Minister, the late Pranab Mukherjee, amended Section 9 of the Income Tax Act to make transactions of the kind put through by Hutchison and Vodafone liable to tax in India. He then proceeded to give the amendment a retrospective effect through a clause inserted in the Finance Bill, 2012, to make Vodafone liable to pay tax on the deal. Unable to reason with the government, Vodafone Group’s Dutch affiliate sought arbitration proceedings in The Hague in 2014, claiming that the tax demand violated the provision for “fair and equitable treatment” under the India-Netherlands Bilateral Investment Treaty. The tribunal has now ruled in Vodafone’s favour.

The government would be well advised to bury the issue here and not go in appeal against the arbitration award. The retrospective tax demand was bad in spirit, something that was acknowledged in the past by the NDA government’s own Finance Minister, the late Arun Jaitley. Sure, there are similar pending disputes with others such as Cairn/Vedanta but the merits in those cases will be determined by the provisions of the underlying Bilateral Investment Treaties. Prudence, therefore, lies in walking away from an appeal in the Vodafone case. Not just this. The government should go the whole hog and scrap the retrospective powers under Section 9 through an amendment to the Income Tax Act as that alone will send a clear signal to foreign investors about the country’s commitment to fairness and certainty in tax laws. Certainty is an important canon of taxation and the government cannot be seen as whimsically changing the law with retrospective effect to suit its own interests. Investors, after all, put in their money based on consistency of policy and a retrospective amendment is a red signal to them.

For the future, there is adequate protection in Section 9 of the Act, as amended in 2012 — and in international efforts to shut out tax avoidance strategies — to ensure that similarly structured deals will not fly. The Modi government could be worried about the optics of these moves — for fear of being branded, yet again, as a “suit-boot ki sarkar” that is partial to business interests. But such political considerations must not come in the way of undoing the mess that the UPA government bequeathed it, and doing what, in the final analysis, is the right thing.

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Published on September 27, 2020
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