The Vodafone retrospective taxation case needs a lot of introspection – especially on the part of the Govt as it is going ahead and appealing this ruling of the Permanent Court of Arbitration at The Hague. 

The international court, on Friday, ruled that India’s retrospective demand of Rs 22,100 crore as capital gains and withholding tax imposed on the British telecommunication company for a 2007 deal was “in breach of the guarantee of fair and equitable treatment”, initiated under the India-Netherlands Bilateral Investment Treaty (BIT). The court has also asked India not to pursue the tax demand any more against Vodafone Group. And yet, we are going ahead and appealing.

A quick flashback of this entire case – in 2007, the Dutch counterpart, Vodafone International Holdings B.V. (VIH) acquired 67% interest in the Indian telecom company Hutchison Essar Limited (HEL) for $11 billion.  This purchase in HEL was done through Hutchison Telecommunications International Limited (HTIL), and routed through Cayman Island based – CGP Investment Ltd, which held 67% stake in HEL. Because it was routed through Cayman, there was no transfer of any capital asset located in India. This how tax haven countries are used and its nothing new- many Indian companies themselves make use of this.

Yet, the Govt then in Sept 2007, raised a demand of Rs.7900 crore in capital gains and withholding tax from Vodafone, saying the company should have deducted the tax at source before making a payment to Hutchison.

Vodafone contested this and the case went to the High Court, which ruled in favor of the Govt, saying that company was liable to pay the taxes claimed.  Vodafone appealed to the Supreme Court and in 2012, it overturned the HC order and ruled that the company did not need to pay any taxes.

And then came in the evil jugglery. The Finance Bill of 2012, amended the very sections, based on which the SC had issued its judgement. The Bill became law and these sections were retrospectively amended, effective 1961. Thus with this the liability grew to Rs.21,000 crore. Once again the taxmen were after Vodafone and the company took umbrage under the India-Netherlands BIT signed in 2012 and said that it’s a complete violation of fair and equitable treatment (FET) promised under the Treaty, which includes an obligation to ensure a stable and predictable regulatory environment. Thus the retrospective taxation was a complete violation of the BIT.

So, here, the ruling of the highest court of India, the SC, was trampled under retrospective legislation, creating an unstable and uncertain environment. The BJP had rightly criticized this but did nothing after it come to power in 2014 about this retrospective tax.

Well, that in short is the saga and Govt after Govt, nothing changed. As per The Hague, we are clearly in the violation of the FET standard under Article 4(1) of the India-Netherlands BIT. India is going to appeal, compounding the mistake which the UPA did in 2012.

Yes, the retrospective tax was brought in first by the UPA in 2012 but the BJP has been in power for the past six years; the Govt bends backwards to adjust FIIs and FDIs. So how come, despite criticizing the “70 years” of the past, it did nothing to correct this situation. It had more than enough time and worse still, it is planning to appeal this ruling too. If this does not send a wrong message what else does? Its like inviting guests with garlands and tempting them with savories and sweets only to be clobbered down once they enter the house. That’s what we are doing right now. And till we correct this usage of retrospective taxes, till we clear this air of uncertainty for foreign companies, our image will never change.

We are being penny wise and pound foolish, paying little attention to preserving global reputation; at this juncture, especially when companies are looking towards India as a favored destination, such issues tarnish the reputation. By trying to wrangle money like this, we are looking only at the short term picture. Unless we change our attitude and do not continue to repeat the mistakes of the UPA, no red carpet will lure the investors.