Contradictory decisions by international arbitration tribunals in the cases of the British telecommunications group Vodafone Group and the oil producer Cairn Energy have led the Union government to introduce the draft tax law (amendment) to the Lok Sabha in order to repeal the retroactive tax provisions that were introduced in 2012. It’s a welcome move that was long overdue, and the proverbial last straw was an order from a French court allowing Cairn Energy to seize 20 Indian government assets in central Paris, including luxury apartments for VIPs, to recover a portion of $ 1.72 billion (arbitration plus costs and interest) that New Delhi owes.
Although the NDA government has repeated its rejection of retrospective taxation since taking office in 2014, it relied on arbitration for too long and, contrary to expectations, hoped for positive judgments to settle the “inheritance disputes”. On December 21, 2020, an arbitration tribunal in The Hague announced its award in favor of Cairn Energy Plc and Cairn UK Holdings Ltd. In another setback for the Indian government last year, the Permanent Court of Arbitration in The Hague ruled that India’s retrospective claim of Rs 22,100 crore in capital gains and withholding tax imposed on Vodafone on a transaction in 2007 violated the guarantee of equal treatment.
The protracted litigation was not only expensive and time-consuming, it also damaged India’s reputation as an investment-friendly travel destination. Hopefully the new legislation will introduce a fair and predictable tax system and build investor confidence, which is a prerequisite for getting the country’s Covid-stricken economy back on track. India is in the middle 63rd place in the Ease of Doing Business Index, far behind other Asian nations such as Singapore, South Korea, Thailand, the United Arab Emirates, Japan and China. Foreign investors have many options, and they won’t prefer countries where they are likely to face uncertainty and intimidation on the tax front. The challenge for India will be to make the most of the new law to attract large investments.