Death and taxes are certain but when, how or why can be most uncertain. Experts find ways and means — sometimes genuine and sometimes sham — of minimising tax liability. This is to contextualise an arbitral panel under the Permanent Court of Arbitration rejecting India’s income tax claim of about Rs 22,100 crore from Vodafone.

The tax dispute goes back to 2007 when Vodafone International Holdings, a company registered in the Netherlands, acquired CGP Investments Limited, a company registered in Cayman Islands. Normally, acquisition of one foreign company by another foreign company should have nothing to do with Indian law and taxmen. A company’s shares are supposed to be situated in the country where it is registered. Legally, only Cayman Islands’ Government had the right to tax the capital gain made by the shareowner as the share sale took place there. However, Cayman Islands does not impose income tax or capital gains tax (and that is why so many companies are registered there.)

Through other offshore entities, the Cayman Island company controlled CK Hutchison Holdings Ltd’s 67 per cent stake in the Indian company, Hutchison Essar Ltd (HEL). So the end result of this share sale was that the ultimate “owner” of the Indian company got changed from the Hong Kong-based Hutchison to the UK-based Vodafone, both controlling the Indian company indirectly through a chain of intermediate companies. Since the share sale in Cayman Islands did not entail any income tax, it was a “tax-efficient” arrangement.

HEL was a joint venture company formed by the Hong Kong-based Hutchison and Essar Group. HEL held a telecom licence. The share sale transaction in Cayman Islands meant that the Hong Kong company Hutchison ceded control of HEL to British company Vodafone to the extent of 67 per cent of HEL shareholding. Had the shares of the Indian company been sold directly, Indian income tax would have been unquestionably payable on capital gains. But Vodafone indirectly acquired 67 per cent control in HEL from Hutchinson in a $11.2b deal.

Indian taxmen did not like what they saw as a tax-dodging arrangement. They argued that the Cayman Islands’ share sale was actually an indirect sale of shares of the Indian company. They raised a demand (2009) of $2.2 billion as capital gains tax. With interest and penalty, the total tax demand rose to Rs 22,100 crore. Vodafone contended that it was not liable to pay tax because the transaction did not involve transfer of any capital asset situated in India.

On January 20, 2012, the Supreme Court ruled that the Government had no jurisdiction to levy tax on overseas transactions between two foreign companies. A sale transaction between two foreigners was beyond Indian tax jurisdiction even if the subject matter of sale was controlling interest in an Indian company having valuable assets. No Indian company had directly sold anything.

The Government requested the Supreme Court to lift the corporate veil to see the true substance of the transaction, the true end-beneficiaries of the transaction and not go by mere form, or the corporate boundaries of shell companies through which ultimate owners operate. These arguments were not accepted. The top court said that the law as it then stood did not allow lifting the corporate veil based on such interpretations. Instead of “look through,” the court adopted a “look at” approach.

Unwilling to give up the tax claim, the Government amended the tax law retrospectively with effect from June 1, 1976, giving itself the power to re-open past mergers and acquisitions if the underlying asset was in India. Vodafone then contested the claim under the Bilateral Investment Treaties (BITs) between India and the Netherlands and between India and UK.

A PCA arbitral tribunal recently adjudicated the investment treaty arbitration dispute and rejected the Indian tax demand. The retrospective change in income tax Law in 2012 was held to vitiate the guarantee of Fair and Equitable Treatment (FET) given to Dutch/British investors under the BITs.

The Government can now appeal against the order in the High Court of Singapore. If not, it has to spend about Rs 85 crore (Rs 40 crore to PCA as 60 per cent of litigation cost and Rs 45 crore refund to Vodafone).

Another similar arbitration involving UK’s Cairn Energy Plc is expected to be concluded soon, where $1 billion of Cairn Energy’s shares have been confiscated.

India and similarly placed financial resource-starved countries face this dilemma. We want to welcome foreign capital to bring financial resources and technology to expand the earning capacity of the Indian economy, create jobs and raise income levels. The investors have a legitimate expectation of a fair and equitable non-discriminatory taxation and regulatory regime, ease of doing business but the Government also has a legitimate interest in collecting taxes. Last year, we reduced corporation tax for new manufacturing companies to a record low of 15 per cent.

There should certainly be a certainty about tax liability but retrospective changes in tax laws are undesirable. They change assessment of future profits and may negate the very basis of important investment decisions.

Discerning eyes can see that the primary driver of the Cayman Islands sale was acquiring controlling interest in the Indian telecom company and the deal was structured to make it an offshore transaction beyond the reach of Indian taxmen, an innovative tax avoidance measure. The world’s rich shift their incomes and wealth from their high-tax home countries to these “tax haven” countries like Cayman Islands having almost no income tax. How can “tax haven” countries defend giving shelter to people running away from their taxing home jurisdictions is a big international debate. It is an ideological battle between tax-free Governments of these countries and remaining “tax-and-spend” Governments who want to impose their ideology on nations following “minimalist Government” ideology.

One country’s “black money” (tax-evaded income) is a source of survival for another. That is how “tax havens” flourish. One would wish greater international cooperation in enforcement and “tax-and-share” being put in place but the interminable debate on limits of taxation, sovereignty and protection to criminals, acceptability of national laws on crime and taxation by outsiders, unfair/unjust/excessive taxation and fair end-use of tax proceeds block any such agreements from fructifying.

Taxation of foreigners and foreign companies presents special challenges. There is a clash between two principles. One is the US system based on “situs” of the assessee’s nationality and the other is the Organisation for Economic Cooperation and Development (OECD) system based on “source” of the assessee’s income.

The tax liability attaches to assessees based on their nationality. A Government may tax its citizens and the companies registered under its national laws. The 2012 Supreme Court judgment was based on the law then in force which limited extra-territorial application of tax laws.

The “situs” of the taxed entity is now pitted against the “source” of the entity’s income. The OECD project on Base Erosion and Profit Shifting (BEPS) is gaining traction.

More and more Governments are now coming to clash with the classical worldview on foreign taxation and asserting that a Government’s jurisdiction extends to foreigners and foreign companies who may be present on their soil or drawing sustenance from it. Big MNCs like Google, Apple, Facebook, Amazon and Netflix are inviting global attention for earning from different countries without contributing enough to the local public exchequer.

There is a global consensus regarding the need for a comprehensive mechanism to tax cross-border transactions in the digital economy. OECD, UN and EU are working on a resolution. We amended the Income Tax Act in 2018 to bring the concept of ‘Significant Economic Presence’ from April 1, 2019, and introduced equalisation levy (Google tax) in an attempt to tax incomes being collected by foreigners from Indian consumers. In an imbalanced world, the terms of trade and investments are not always favourable to emerging economies. They also don’t have the freedom to print money and spend. Balance has to be struck between fair taxation and honest tax compliance in form and substance.

(The author is an IAAS officer, superannuated as Special Secretary, Ministry of Commerce and Industry.)

The trouble with human rights watchdogs is that they have, by virtue of countering the establishment narrative, assigned themselves a certain kind of legitimacy and credibility without realising that some of their own investigations are compromised by subjective assessment rather than objective investigation. This has also been a problem with Amnesty International, which has many times been accused of looking at India through a Western prism. But as a robust democracy, we have it within ourselves to accept vilification and acknowledge cogent counterpoints. We shouldn’t need lobbyists to get the other side of the story; our media should be free to do that. Besides, by and large, the organisation has an international acceptability even if we take some of its reports with a pinch of salt. But by targetting Amnesty, which says it is now forced to shut shop in India because the Government has completely frozen its bank accounts here, we appear to be in the bracket of oppressor and authoritative regimes like China. And considering its activists have been particularly penalised for tracking dissent pan-India over the last two years, it gives them a moral upper hand and claim a witch-hunt. The reasons that the organisation lists behind the Government crackdown on it are the same as those cited by tormented civil society activists — namely “unequivocal calls for transparency in the Government, more recently for accountability of the Delhi police and the Government of India regarding the grave human rights violations in Delhi riots and Jammu & Kashmir.” Frankly, even without the Amnesty’s reports, there is far too much on-ground evidence of the charges it has made. And the way the disclosure statements and names in the chargesheet of the Delhi Police on the city riots have been circled out, targetting the liberal intelligentsia, protesters and activists while leaving out the inflammatory fringe Rightists, there is a move to freeze the right of democratic dissent. So the timing of its India exit suits Amnesty more than us at this point of time.  

 It would have made more sense had the Government zeroed in on Amnesty in 2016, when it was booked in a sedition case for allowing “anti-India” slogans on Kashmir at an event in Bengaluru. But to pursue it for violating foreign funding rules in 2019 obviously raises questions on intent. Amnesty though claims that its India operations have been funded domestically. The immediate context seems to be the report it released last month on the complicity of Delhi police in the riots. Yes we must defend our pluralism and challenge the official narrative. But by hounding out Amnesty, we have a public relations battle ahead. Nothing will happen to it. Nothing would have if it had been allowed to continue.

The contagion has changed how business is conducted the world over. Firms which are unable to adapt are perishing as remote- working has become a norm. The post-pandemic world could throw up a lot of challenges and businesses need to revise their strategies in numerous ways to acclimatise themselves to the disruptions. An open organisational culture towards innovation, structured horizon planning and most importantly exceptional value proposition for customers and stakeholders will help businesses survive in these difficult times. Flexibility has also become crucial during these testing times. For example, a number of companies like Ford, Coca-Cola, 3M, Honeywell have augmented their traditional business models and their usual products to produce PPE (personal protective equipment) to fight the outbreak. In these exceptional global conditions, coopetition — cooperation between competitors — will be vital in times to come as survival takes prominence over rivalry. According to Bengttson and Kock, coopetition can be defined as a complex association between two business players, irrespective of their involvement, be it horizontal or vertical. A horizontal relationship would mean being business competitors or complementers in the same sector, producing similar products, whereas vertical business involves suppliers and customers. Research in this domain is unravelling tremendous benefits for competitors, who are forging mutually beneficial collaborations that are based on coopetition strategies where companies share resources such as equipment, funds and capabilities, like technical know-how, expertise and experience. These initiatives ensure mutually-beneficial outcomes by pursuing goals collaboratively that otherwise would be difficult to chase, which in turn improves their financial performance.

However, there is a catch here. Coopetition is not as easy as it seems, as rivals cannot suddenly collaborate, as this has to happen at all levels, top, middle and bottom. According to researchers, the degree of collaboration is inversely proportionate to the magnitude of rivalry or competition. In fact, it is a delicate balance between collaboration and rivalry. If businesses that complement each other work together, there is a potential for huge benefits. But if rivalry or competition is high, it could lead to adverse performance outcomes.

Several rival companies have taken advantage of collaboration and there are several motives to take this strategic route. First and foremost, the main motive is to effectively utilise scarce resources. Coopetition can effectively utilise scarce resources by integrating them to efficient production with lower risks. For example, in the electronics industry, Samsung Electronics and Sony worked together to develop the flat screen LED televisions by sharing R&D costs. This strategy is also used to increase the current market size or create a new market by introducing new products or services. Costs and risks are shared and companies can dominate their competitors. In the automobile industry, rivals Ford and Toyota teamed up to develop Atlas Ford F-150 hybrid pick-up truck, which went on to become the best-selling hybrid in this segment. The third motive is to augment the competitive position by increasing the market share. Protecting the current market share and increasing the same is one of the important strategies of firms. Giants like Google and Mozilla are working together with Google supporting and funding Firefox, Mozilla’s web browser, to beat the web browsers of its rivals Apple and Microsoft.

There are several other examples to show how companies benefit through coopetition. EDX is a non-profit organisation, which was founded by rivals Harvard University and MIT to provide free online education worldwide. Similar coopetition can also be seen between Amazon (Kindle) and Apple (iPad). They entered into an agreement in 2007 to deliver Amazon e-books through an iPad Kindle App which enabled Amazon to access a wider market and made iPad a complete content provider. This type of cooperation is also seen in the airline industry where competitor airlines use each other’s networks and ground staff for efficient services. One example is the Star Alliance network of competing airlines Thai Airways, Singapore Airlines, Lufthansa, Air India and many more. Its aim was to provide a seamless experience to travellers and also save on logistics, marketing and other costs. Fierce competitors in the beverage industry, Coca-Cola and Pepsi, along with Red Bull and Unilever have come together to set up a non-profit organisation to develop sustainable supply chain technologies, particularly in refrigeration, to fight global warming and ozone depletion. The phenomenon of coopetition gained popularity as a counter-intuitive strategy for a networked economy, leading to mutual benefits for both firms, like increasing their knowledge and expertise, sharing costs of new developments and R&D, improving market share and expanding into new markets. With the advent of technology, it is now easier for firms to reach out to competitors and other stakeholders. This strategy of cooperation among competitors and suppliers will be all the more useful in these exceptional times.

 (The writer is Associate Professor, Amity University, Noida)

China has enjoyed showing its thumb to the world and in a brazen display of insensitivity, it recently allowed a mass beach party to take place in the city of Wuhan, the epicentre of the contagion that is ravaging the lungs of people across the world as well as the global economy. Stock markets worldwide are in a tumble once again as renewed curbs across Europe, following a resurgence of the pandemic, cast a shadow on economic activity that was picking up pace. The cascading impact hit D Street, too, as foreign portfolio investors and domestic institutions dumped shares, plunging graphs southwards. And although our market has recovered by about 50 per cent from the lows of March, it is still patchy and any decelerator sends it crashing too. Large countries like the UK as well as several cities and states across the US are being forced into another round of lockdown to prevent a devastating “second wave,” which means shuttering businesses that had opened. In India, while numbers have stabilised, albeit with lower testing numbers as well as evidence that district and city level officials are restricting testing deliberately, the pandemic appears to have become a fact of life with most cities whirring back. In Kerala, the State Government is allowing asymptomatic workers to return to their jobs in a secluded work zone. Yet, full steam ahead is quite a way off. While the impending festive season and the action in the Indian Premier League (IPL) will bring a spending boost, the levels will be nowhere close to those of past years. The problem is while businesses aren’t completely dysfunctional, allowed as they are to operate freely in non-restricted areas, they are inter-connected to supply and distribution chains across States. Stalling of operations in one hub in a badly-hit State is bound to affect others as the cascading effect slows down the sector a particular business is into, and thereby grunts the overall economy. With attendance and production capacity affected by restrictions, some sectors cannot even take off optimally. Bengaluru is a prime example. With most IT workers having left the city through a series of lockdowns, they returned in waves, thereby, slowing down the  desired momentum for recovery. All such micro-blocks are threatening to disrupt the little gains made in reviving the economy. A slew of economic relief measures, too, has failed to inspire confidence among businesses as corporate finances remain squeezed, sales have not regained momentum and demand remains low. Even the amount allocated for bailing out MSMEs remains largely undistributed.

As some have described it, 2020 is a lost year, a year spent bleeding and that can only stop next year. Anyway the process of full recovery will not start before 2022. That said, others are still quite hopeful of a rebound economy and while expecting numbers to be lower than before, they feel they would be fairly decent. Many of these people are seen in the stock exchanges betting big. The rise in the price of many major stocks despite the lost first and insipid second quarters of the year was a sign that some would hold out long-term. As long as COVID-19 is around, there will be a continuing drop in demand and supply chain inconsistencies. Besides, there are sectoral spurts while the economy as a whole needs to stabilise. Given the Government’s long-range structural reforms, stimulus and relief by RBI, many investors are still using the volatility to their advantage by focussing on long-term prospects and asset allocation and choosing to build a solid portfolio. While many Indians do not have a choice but to live with the virus, some nations might prioritise differently. That said, it appears that the virus will keep on coming back. If we are to learn anything from the 1919-1920 Spanish flu epidemic, it is that it just took time to eliminate it. Vaccines did not exist then. But a price of asking for time will be that the economic bleeding might last longer and many worry that a body without any blood is not worth saving. So, will 2021 also be frightening year? It is a question worth asking now. Global ratings agency Fitch has already estimated that the Indian economy is expected to contract by 10.5 per cent in 2020-21. And while industry federations are hopeful that growth can be expedited through continued government support and hand-holding of businesses during this crisis, they are still cautiously optimistic about full capacity utilisation. This is going to be a long road to recovery.

(Courtesy: The Pioneer)

Responding to the pandemic, the Reserve Bank of India (RBI) had “permitted” banks to grant moratorium on payment of instalments of term loans due after March 1 up to August 31. A similar dispensation was “allowed” on recovery of interest on working capital. The moratorium was initially permitted up to the end of April and 55.1 per cent of customers of Scheduled Commercial Banks (SCBs), accounting for 50 per cent of outstanding credit, had availed this facility. In Public Sector Banks (PSBs), 80.3 per cent of all individual customers, accounting for 80 per cent of total outstanding individual loans, opted for the moratorium. A whopping 74 per cent of Micro, Small and Medium Enterprise (MSME) borrowers and 28.8 per cent of corporate borrowers, covering 81.5 per cent and 58 per cent (by outstanding amount in category loans), availed the facility.

For private banks, 41.8 per cent of individual customers, accounting for 80 per cent of outstanding individual loans, and 20.9 per cent of all MSME customers opted for moratoriums, comprising 42.5 per cent of outstanding loans to MSMEs. About 21.6 per cent of corporate borrowers, covering 19.6 per cent of total outstanding corporate loans, had availed the facility.

The Supreme Court has extended the moratorium and the Central Government has appointed an expert panel to look into the issue. Exactly how many loans accounts and what loan amount is under moratorium are not known. Some borrowers may have decided against seeking the moratorium facility due to uncertainty about relief on interest. Had the interest relief been announced upfront, almost all borrowers would have instantly opted for the moratorium, except possibly for borrowers too proud of their financial standing to seek any relief.

Since the verdict of the apex court was not available by August 31, it was the borrowers’ call to take a wager on the verdict and decide whether to opt for a moratorium or not. It is unclear if the relief, if and when granted, would be available only to those availing of the moratorium. Overall, the system lacks incentives for those remaining fully compliant while the non-compliant people may hope to get some relief. Had the interest relief been a matter of legal right under the Banking Regulation or Disaster Management Acts, it would have been through by now. The Disaster Management Act (DMA), empowering the Government to take immediate relief and rescue measures, cannot be over-read to give it unfettered powers to deal with the full economic fallout of the disaster. It certainly does not empower the Government to alter terms of private contracts on jobs, rentals, sales, lending and so on. That explains why the tone and tenor of parts of the “orders” issued under the DMA is not peremptory, prescriptive, definitive but indicative, persuasive and advisory in nature. Hence, legally binding orders regarding timely payment of full salaries, non-recovery of rent and school fees and so on could not be issued for this reason. Appeals to good conscience is a different matter.

Likewise, the Banking Regulation Act (BR Act) would by itself not confer any rights on the RBI to mandate any alteration in individual contracts entered into by the banks unless supplemented with legal remedies under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act (SARFAESI Act) or the Insolvency and Bankruptcy Code (IBC). Appropriately, the RBI has “permitted” grants of moratorium while extending regulatory forbearance on recognition of the non-performing asset (NPA).  The BR Act does not empower the RBI to mandate changing loan terms already contracted. Loan contracts can be changed only on the orders of insolvency courts. Mandatory moratorium requires more than the BR Act.

There are no free lunches in economics except those paid for by others. If borrowers get interest relief during the moratorium period, bank investors and depositors would stand to lose unless compensated by the Government, like it happens in farm loan waivers. Charity at others’ expense is systemic. Relief to borrowers at the expense of depositors is akin to relief to consumers ending up suppressing remunerative market prices for farmers.The bank depositors are also adversely impacted by the pandemic-induced fall in interest rates that stand to benefit new borrowers as well as the borrowers who are able to refinance high-cost old loans. The post-outbreak rate cuts and liquidity infusion by the RBI, aided by rising foreign exchange reserves, has caused a precipitous fall in interest rates. Some are offering record-low home loan interest rates under seven per cent per annum with new products of repo-linked home loans on offer. Low interest rates bring cheer to borrowers but gloom to depositors.

There are no fiscal guarantees to depositors on minimum interest rates and the IBC haircuts have been too costly in some cases. When corporate borrowers get a tax reduction bonanza, they don’t share the booty with lenders as they are not obliged to. When farm loans are waived, Governments provide fiscal support to banks but at present the Centre does not seem able and willing to compensate the banks for interest relief.

In the absence of fully disaggregated data on different types of loans under moratorium, a back-of-the-envelope quantification of the impact of interest relief can be Rs 1 lakh crore per month, assuming interest relief to be about one per cent per month on total pre-pandemic outstanding credit of about Rs 100 lakh crore. Even direct fiscal relief to the general population is not of this magnitude.

Financial stakes on the Supreme Court’s verdict are very high. The interest relief has been sought from the highest court of justice precisely because it is not a legal right. The golden balance of justice is being watched by distressed borrowers and anxious depositors. All borrowers are not equally distressed by the pandemic. Some differentiating criterion based on quantum of liability outstanding on March 1 and  purpose of loan (whether educational; for first home/car or second one, for the Economically Weaker Section or affordable housing, past credit history) and proven impact of the contagion on income can be evolved to give relief to a truly needy class of borrowers. The relief even to this subset should not be entirely a burden on bank depositors. Ideally such relief is best provided by governments under fiscal stimulus paid by taxpayers, current or future.

The need to maintain the health of banks can hardly be overemphasised. Deep-rooted socio-cultural beliefs stigmatising indebtedness (indebted person embarrassed and lenders reviled ) continue to change worldwide.

Post World War, the wheels of growth are lubricated by the continuous supply of credit. India joined the borrow/spend bandwagon in the 80s. Lending by Scheduled Commercial Banks rose from Rs 8,64,300 crore (30 per cent of the Gross Domestic Product [GDP]) at the end of March 2004 to Rs 67,35,200 crore at the end of March 2014 (60 per cent of the GDP). At present, bank lending is only about 50 per cent of the GDP.

As on July 31, the total deposits of SCBs were Rs 141,61,689 crore (Rs 127,44,583 crore a year ago); outstanding credit was Rs 102,65,888 crore (Rs 97,29,002 crore a year ago) and investments were Rs 42,78,294 crore (Rs 35,57,063 crore a year ago). The combined effect of risk aversion of banks to lend and predominantly domestic financing of fiscal deficit is that only about two-third of deposits get lent to non-Government entities.

We have made great strides in terms of expanding the reach of banking services and financialisation of savings but high-profile delinquencies by those who can afford to pay continue to eclipse these achievements.

The gross NPA of SCBs that had peaked to 11.2 per cent in 2017-18 has been brought down to 8.5 per cent by March. This achievement is at great cost to bank investors/depositors on account of hefty haircuts following not-so-competitive slump sales of distressed companies under the conventional, single round bidding system being followed under the IBC. The RBI has assessed that the gross NPA of all SCBs may increase from 8.5 per cent in March to 12.5 per cent by March 2021 and even to 14.7 per cent if the adverse economic impact of the pandemic is very severe. Seeing the plight of forecasting tools, the economic fallout of the contagion is hard to predict and measure.

Since bank lending is only about 50 per cent of the GDP and post-pandemic recovery would require a heavy dose of credit, it is imperative to maintain incentives for financial savings.

Erosion of bank profitability runs the risk of dire consequences of de-finacialisation or informalisation of savings, derailing the hard-won recovery. The banking system needs calibrated support to prevent relapse into transmitted sickness.

(The writer is a retired IAAS officer and former  Special Secretary, Ministry of Commerce and Industry.)