Don’t Look Back To Hanker

Context: GoI scrapping retrospective taxes is welcome, but it’s not enough.

Evolution and demise of retrospective taxation in India

• 2012 – The beginning: Hutchison Whampoa of Hong Kong sold its telecom interests in India to Vodafone at a big profit. India claimed it should be paid capital gains tax even though the deal was abroad between two foreign parties since the underlying assets were in India.
• Judicial directives and legislative overreach: The Supreme Court ruled in favour of Vodafone.
• Instead of accepting this, the UPA government amended the tax law enabling it to levy capital gains tax with retrospective effect from 1962.
• The policy continued under NDA: Then Finance minister said he could not disallow 17 old tax cases already launched under 2012 law but would not use retrospective prosecution in future.
• International Arbitration: Vodafone and Cairn challenged GoI in an international tribunal for violating bilateral tax treaties, and both won their cases.
• To satisfy its arbitration victory, Cairn sought to seize assets of the Indian government abroad, such as planes, ships and financial assets.
• Scrapping of retrospective taxation: The government is scrapping the 2012 law on retrospective taxation of capital gains in deals made abroad if the assets themselves were in India.

Implications of the retrospective taxation episode

• Dragging privatisation plans: None of the major PSUs has been privatised after years of effort.
  • Lacks clarity: Bidders want complete clarity on what exactly they are buying, whether other parties can raise post-privatisation, and what assets might be seized by third parties. 
  • Federal differences: Eg. the Assam government refused to tolerate the sale of BPCL’s Numaligarh refinery to any private-sector party. So, BPCL had to sell its stake in Numaligarh to a consortium of the Assam government and two public sector companies, Oil India and Engineers India.
• Complexities not to end with a new policy: New law does not admit any government liability for the interest and legal costs of the companies concerned. If Cairn insists on full recovery of arbitration awards, including interest and costs, things can get complex again.

Conclusion: Retrospective taxation is not only immoral but bad in practice too. India wants all future disputes to be settled in India, not abroad. Given interminable delays in India, we should welcome the quick resolution of disputes in international arbitration, reducing the caseload in India. Rescinding the 2012 law is a good start. But much more is needed.