Vodafone conundrum and India's tax regime

Context: The international court's ruling shows that a law amended by India's Parliament has remained only on paper.

Judgements related to the Issue:

• Bombay High Court (HC) on September 8, 2010:  Held that India had the territorial jurisdiction, and allowed Vodafone International Holdings BV, Netherlands, to agitate before the tax authority

• Supreme Court (SC) on January 20, 2012: Held that India had no territorial jurisdiction if non-residents transfer such assets indirectly.

Parliament's reaction on the Judgements:

• India's Parliament clarified to the contrary of SC judgement: For Parliament, it is not the question of paying tax or deducting tax at source, but a question on the territorial jurisdiction of a Sovereign Democratic Republic.

• Brought Retrospective amendment by the Finance Act, 2012: Any share/interest in a company outside India shall be deemed to be situated in India if the value of such share or interest is derived substantially from assets located in India. 

Negative implication of the SC judgement & the International Arbitration:

• Escaping the clutches of Indian Laws: By simply shifting their base outside India, the companies can then escape from the clutches of India's laws.

• Bypassing of the Acts: Vodafone triggered the India-Netherlands Bilateral Investment Promotion Agreement (BIPA) and thus bypassed the Income Tax Act 1961 in the name of "national treatment" and "most favoured treatment".

• Puts a question on India territorial jurisdiction: being the Sovereign Democratic Republic, transactions involving domestic assets in the case neglect India's territorial jurisdiction.

• Things remained only on paper: This amounts to subversion of the rule of law

• India's law amended by Parliament has remained only on paper. 
• The income tax department's tax demand raised on Vodafone has remained only on paper.

• Hurting Investors: Every investor will ultimately prefer a destination committed to the rule of law rather than a regime that subverts it.

Arguments for India's jurisdiction

• Vodafone's implicit acceptance of India's jurisdiction: when it approached the Foreign Investment Promotion Board (FIPB) in 2007 for approval before remitting funds from the Cayman Islands to Hong Kong. 

• Presence of a Settled law: It is a settled law that treaty obligations have to be in harmony with domestic legislation. 

• For, E.g. presence of domestic laws like Income Tax Act 1961 and the Retrospective Amendments to the Finance Act of 2012 should take precedence.
• Collecting legitimate tax dues is the bounden duty of the State.