Solving the issue of Retrospective Taxation

Synopsis:

The two cases of retrospective taxation related to Vodafone and Cairn energy can be solved. It is possible if the government and companies collectively decide to do mutual bargains. Filing more and more cases in international tribunals might not deliver optimum results. 

Background:

• Both the companies individually filed a case in the Permanent Court of Arbitration against its retrospective taxation of 2012.
  • Retrospective Taxation means the imposition of tax from a time behind the date on which the law is passed.
• The PCA has given the award in favour of both the companies in 2020. However, India has decided to challenge both of them.

About the Arbitration award:

• PCA in its September 2020 award ruled against the imposition of 27900 crore rupees retrospective tax on Vodafone. It said that taxation was against India-Netherlands BIT (Bilateral Investment Treaty). The court ordered India to pay 45000 crore rupees to Vodafone.
• Similarly, in December 2020, the court held India’s action of imposing 10247 crore tax liability on Cairn is a violation of the India-United Kingdom BIT. The court ordered India to pay 90000 to the company.

Post-award Scenario:

• Cairn has started enforcement proceedings in the US, UK, Netherlands, Singapore and Canada. The company refrained from initiating any enforcement in India due to uncertainty over public policy and poor track record of courts in enforcing foreign awards.
• India will now have to defend its position in foreign jurisdictions of enforcement, primarily on the grounds of sovereign immunity and public policy.
• Parallelly, the Indian Government has decided to challenge the award.

Problems in challenging the Cairn award:

• The government’s action of retrospective taxation and subsequent inducement to pay is deemed as a wilful, unfair and inequitable measure. Such measures are not allowed under International Law.
• The act of government is also against the Bilateral Investment Treaties signed by it under International Law. The use of sovereign taxation powers to undermine BITs is not justified under international law.  

Way Forward:

• India can definitely use defence of international public policy against tax avoidance. Similarly, the defence of sovereignty of a state can be used to determine what transactions can or cannot be taxable. This would help in challenging the awards.
• However, an amicable solution can be developed if both – companies and government are willing to do mutual bargains.
  • The government gave an offer to Cairn under the ‘Vivad se Vishwas scheme’. The company should pay 50% of the principal amount and remaining other things like interest and penalty would be waived off.
  • Re-computation of tax liability on a long term capital gains basis has also been offered.
  • Further the companies should understand the huge potential of the Indian market that should induce them towards dialogue. This is proved by the fact that India comes to the list of top 12 FDI destinations of the world.  

An expeditious solution is desired in order to sustain the investor’s trust. It will bring billions of investment in India and show respect towards bilateral commitments. Although the two awards have been challenged, the work on mutual settlement should be carried on in a parallel way.