Issue of Retrospective tax cases; what should India do next?

Context: After Vodafone, India has lost its 2nd case to Cairn Plc at Permanent Court of Arbitration over a retrospective tax demand. Now, what are the options left with India and which one should it chose? 

WHAT ARE THE CASES IN QUESTION? 

• Very recently, Cairn Plc has won a case of retrospective tax against India at Permanent Court of Arbitration. Court has asked Indian government to pay for damages to the tune of $1.4 billion. 
• Previously in this year only, Indian Government lost a retrospective taxation case to Vodafone, where government need to pay around ₹80 crore, if it doesn’t make any further appeal.   

Now India has been left with the option of either conceding defeat and making payment to the companies or making further appeals. But cost-benefit analysis of both the option is necessary. 

Read More – India lost Retrospective taxation case to Cairn 

WHY GOVERNMENT SHOULD NOT MAKE ANY FURTHER APPEALS? 

• Firstly, there is a need for attracting global investments to the country and any further appeal would put investors in a doubt. 
• Secondly, the stance of the present government on the issue was different in the past. They called out the UPA government for setting free “tax terrorism” and “uncertainty” in the country by enacting retrospective taxation. 

• The Centre has now filed an appeal in the Vodafone matter in Singapore because it cannot take a different stance on two similar cases. A similar appeal too can be expected on Cairn. 

• Thirdly, it would further dampen India’s reputation as the court already noted that this was a breach of fair treatment under the UK-India bilateral investment treaty. 

WHY GOVERNMENT SHOULD MAKE FURTHER APPEALS? 

• Keeping in mind the cost on exchequer, the government should make further appeals. This verdict includes a sharp $1.4 billion payable as damages to Cairn. 

• In the Vodafone case, the government would need to divide out around ₹80 crore if it were to accept defeat. 

• Finance Minister Nirmala Sitharaman has repeatedly stated that India retains the supreme right to put taxes. 

As a first step after this setback, government must analyse carefully all the available options with it, as India is already suffering from an economic slowdown and looking to strengthen its domestic manufacturing capability. Some of the available options might turn away the foreign investment and technology associated with it.