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India in a quagmire by challenging the court order favouring Vodafone

(ATF) Critics have attacked India’s move on Wednesday to challenge an international tribunal’s verdict in favour of Vodafone, the British telecom giant, in Singapore. They say India is not only getting caught in a quagmire of its making, but also sending a bad signal to foreign investors.

That is the unanimous opinion of experts, who are sceptical about India dragging its feet on a tax dispute that it has lost repeatedly in international courts.

Ending “tax terrorism” and honouring tax arbitration awards were the assurance given by the BJP Party-led government after winning the 2014 election that brought Narendra Modi to power. Those promises gave hope to investors like UK’s Vodafone and Cairn Energy, two foreign investors that have invested billion in India but have been mired in Indian tax disputes for years.

But all hopes were belied when India challenged the international arbitration court’s verdict against it over a $2-billion tax claim involving Vodafone, as reported by Reuters on Thursday.

Vodafone won the case against India in September, ending one of the most high-profile disputes in the country that had caused concern among investors over retrospective tax claims on corporate groups.

An international arbitration tribunal in The Hague ruled that India’s imposition of a tax liability on Vodafone was a breach of an investment treaty agreement between India and the Netherlands.

India was permitted 90 days to appeal if it disagreed with the ruling.

Caught in a quagmire

Central to the controversy is the question of whether an indirect transfer of assets located in India can be taxed under Indian tax laws when the assets are transferred directly from one owner to another.

In a law enacted in 2012 India imposed capital gains tax on the transfer of assets in India to all transactions, even retrospectively from 1962.

According to most experts, that was an unfair imposition because business decisions are based upon the current tax laws and no business activity can be organised based on a future law that is made to apply retrospectively.

An efficient tax system should be predictable, certain and stable, experts say; hence any retrospective implementation of a tax is a retrograde move.

When the Modi-government assumed power, it gave a series of assurances that the administration would strive to not only remove the controversial law, but will also honour arbitration awards in cases where companies had challenged tax demands raised by the previous regime using the retrospective tax legislation.

Aside from Vodafone, India since 2012 has faced a string of arbitration cases by investors such as Deutsche Telekom, Nissan Motor, and Cairn Energy over issues ranging from retrospective taxation to payment disputes.

“India has made a law taxing overseas transfer of assets retrospectively, which was wrong and the first mess India created for itself,” Dinesh Kanabar, CEO of the legal advisory firm Dhruva Advisors, told Asia Times Financial.

“And two, even after the Supreme Court rebuked the law later on and India promised to address the issue, the present administration has been unable to do anything about it. India should do well to gracefully accept the international ruling rather than to go on to challenge that order, by which India is getting caught in its own quagmire,” Kanabar, who is also an adviser to Vodafone, added.

Repeat blows

In yet another major setback, India lost an international arbitration case to energy giant Cairn over the retrospective levy of taxes, and has been asked to pay damages totalling $1.2 billion to the UK firm.

The verdict came on Tuesday night, barely three months after India lost arbitration to Vodafone over the retrospective tax legislation amendment.

The Permanent Court of Arbitration at the Hague also held that the retrospective legislation imposed on Cairn was in breach of the guarantee of fair and equitable treatment guaranteed under the Bilateral Investment Treaty between India and the UK. The tribunal asked the government to cease such breaches of the international treaty.

Also, India’s Supreme Court early last month allowed Bengaluru-based start-up Devas Multimedia to pursue a case of arbitration in a US court against Antrix Corporation, the commercial arm of the Indian Space Research Organisation, for cancelling a satellite deal.

Devas was seeking a compensation of $1.2 billion for the cancellation and Antrix had initially refused to participate in arbitration.

Sending wrong signals

Experts believe that despite universal criticism of its retrospective taxation, the government’s move to challenge the Vodafone order in the Singapore court, sends a bad signal to foreign investors.

“The issue of retrospective amendment has been a fear amongst investors and that India has decided to drag on with this issue is sending a signal that India can change the goalpost any time and there is no certainty in its legal regime,” Anuradha Dutt, a partner of the law firm DMD Advocates, and also a counsel for Vodafone told ATF.

As a democracy the rule of law in India gets shaken by the fact that the government continues to fight after losing a case, she said, adding, “It is not in India’s interest to challenge the (Vodafone) ruling.”

Government sources though have reportedly said that the award favouring Vodafone needed to be challenged since it questioned the right of a sovereign to levy tax and not on the tax demand per se.

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Indrajit Basu

Indrajit Basu is an India-based correspondent for Asia Financial and wears two hats: journalist and researcher (equity). Before joining AF he reported on business, finance, technology, wealth management, and current affairs for China Daily, SCMP, UPI, India Today Group, Indian Express Group, and many more. He is also an award-winning researcher. If he didn't have to pay bills, he would be a wanderer.

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