The Government should accept the arbitration verdict and draw a line under the Vodafone issue
Pranab Mukherjee was a consummate politician and when the man, who was India’s 13th President, passed away recently, he was fondly remembered by all across the political spectrum. Yet, one of Mukherjee’s legacies as Finance Minister was the unfortunate retrospective tax legislation that he included in one of the Finance Bills he presented. This singular piece of legislation, for which the entire Cabinet of the time, including Dr Manmohan Singh, must share responsibility, ruined India’s reputation as an investment destination. It was in May 2012 that the Parliament passed the Finance Act under which various provisions of the Income Tax Act, 1961, were amended with retrospective effect to tax any gain on transfer of shares in a non-Indian company which derived substantial value from underlying Indian assets. And the exemplar of this legislation was the case the Government fought against British telecom giant Vodafone. Despite losing the case in the Supreme Court, tax authorities and the Government doubled down and the case went to arbitration in London, where even the member appointed by the Indian Government was found in Vodafone’s favour. The international arbitration tribunal ruled that India’s demand in past taxes was in fact a breach of fair treatment under the bilateral investment protection pact. Vodafone India was later on merged with Aditya Birla Group’s telecom company Idea.
Mukherjee had logic on his side when he wanted to tax deals where entities operating in the Indian market were bought and sold, even if they were not “based” in India. However, to make any act of legislation retrospective is not only unfair, it is also a confidence buster for investors, the thinking being that if it can be done once, it can be done again. When Narendra Modi said that he wanted to make doing business easier in India, he should have started by withdrawing the case against Vodafone and some other companies like Cairn. Maybe it wasn’t done lest he be accused of being friendly to industrialists or the tax authorities thought that they had a good case (as they always think) but now that the arbitration case has been lost, it is time to end this once and for all. This was a clear instance of tax terrorism and India’s reputation suffered as a result. At a time we need to roll out the red carpet for all investors, that is the least that can be done right now.