There’s a Flip Side to Vodafone’s Case of ‘Retrospective’ Taxation

Context: The government of India has recently lost a case against Vodafone in an international arbitration court. 

Critiques to the government 

• The government  made tax changes with retrospective effect: This was done in 2012  after the government lost the Vodafone case in our Supreme Court

• Unstable tax regimes: Tax regimes must be stable in order to attract foreign (or even domestic) investment

Arguments favouring the government

• Vodafone had resorted to tax avoidance by using a grey area in Indian tax law: By shifting the relevant jurisdiction to a tax haven.

• Bombay High Court ruled against Vodafone: Though Vodafone won its appeal in the Supreme Court, it was largely on the basis of a technicality.

• Supreme Court's interpretation is debatable: Supreme Court said that the business connection rule that would have enabled India to tax an asset transfer abroad applied only to revenue transactions and not capital ones. 

• Sovereign can't make open-ended promise over the stability of tax regimes: 

• Companies must see occasional changes in tax policies as part of their business risk, especially in a world where high growth rates and commensurate jobs are no longer a sure thing. 

• For long-term tax stability,  sovereigns occasionally make destabilizing policy moves

• No new tax introduced:  The "retrospective" aspect was a clarification of the existing law, not a completely new tax applied to Vodafone. 

• Even prospective taxation tends to have retrospective implications: 

• For e.g., if a government decides to impose a wealth tax from the current year, the tax will not be on wealth accumulated prospectively. It will apply to wealth created in the past.

Issues with the provisions of special tax treatment in India:

• Tax incentives favour capital over labour: Giving capital based tax incentives would detract entrepreneurs from hiring of labours.
• Special treatment to capital will continue to skew investor orientation in favour of machines and technology over human workers. 

• The case for over-focus on capital is non-existent: since fair and non-arbitrary treatment is a reasonable expectation; special treatment is not.

Conclusion: Government should not prolong the case as Vodafone has already been hit with massive demands for past spectrum payments after the Supreme Court interpretation of "Aggregate Gross Revenues".