The reason India may appeal against Vodafone retro tax arbitration

Representational Image&nbsp

New Delhi: "Tax claims--right or wrong--are a sovereign right and can that be impinged upon by international tribunal orders that invoke bilateral investment treaties?"

This is what a very senior government source told ET Now when asked if India will appeal against the international tribunal's unanimous verdict in favour of Vodafone in the infamous Rs 30,000 cr retrospective tax case. India still has two bites of the cherry left in the appeal process, beginning with the Singapore High Court. 

The source went on to say, "This government has been and continues to be against retrospective taxation. But a bilateral investment agreement is for protection and facilitation of investments. It has nothing to do with tax policy, and can India allow the invocation of these treaties for tax claims?" 

While the Narendra Modi government has not yet decided on appealing, it seems to be leaning towards it because of this very reason: the arbitration award citing a violation of the India-Netherlands Bilateral Investment Protection Agreement. It held India in breach of the guarantee of fair and equitable treatment of the terms laid out in the treaty. 

"Will this open a pandora box? We are studying if this will create a precedent of multinational companies invoking bilateral treaties to just delay tax payments or to wriggle out of them," said another senior member of the government.

When ET Now reached out to the Vodafone camp, an insider said, "But then why does India sign these treaties? India signed the treaty promising fair and equitable treatment for investments, and that covers the legislature, executive and the judiciary. How did Vodafone get a fair & equitable treatment in India? The Supreme Court  had ruled in its favour, and then a retrospective tax law is brought in just to overturn the ruling of the top court of the land."

India's image as an investment destination had taken a serious blow when the UPA Government had introduced this law in 2012. 

Since coming to power in 2014, the Narendra Modi government led by the Late Finance Minister Arun Jaitley had vociferously spoken against the UPA's retrospective tax amendments which were perceived to be aimed at Vodafone. 

In his 2014 Union Budget speech, Jaitley had said, "The sovereign right of the Government to undertake retrospective legislation is unquestionable. However, this power has to be exercised with extreme caution and judiciousness keeping in mind the impact of each such measure on the economy and the overall investment climate. This Government will not ordinarily bring about any change retrospectively which creates a fresh liability. Hon’ble Members are aware that consequent upon certain retrospective amendments to the Income Tax Act 1961 undertaken through the Finance Act 2012, a few cases have come up in various courts and other legal fora. These cases are at different stages of pendency and will naturally reach their logical conclusion. At this juncture, I would like to convey to this August House and also the investors' community at large that we are committed to providing a stable and predictable taxation regime that would be investor friendly and spur growth."

In 2016, in another Budget speech, Jaitley had attempted a one-time settlement whereby companies embroiled in tax disputes could pay the tax claim and have the interest and penalty waived. Vodafone had decided to not go in for the settlement. It had said in a statement, "From the outset, we have maintained that there was no tax to pay, a view upheld by the Supreme Court, and the retrospective law, in any case, concerned tax on the gain made by Hutchison. Vodafone, as the buyer, clearly made no capital gain whatsoever.”  

Back in 2007, Vodafone had bought a controlling stake in Hutchison Essar for $11.2bn. India's tax department opined Vodafone should have withheld tax and had subsequently sent a notice for Rs 11,218cr and later added penalties of almost Rs 8,000 crore.