JOIN USThe rejection by the Permanent Court of Arbitration at the Hague of the Indian government’s Rs 10,247 crore tax demand on British energy major Cairn Plc is the second instance of an international court holding the retrospective tax provision in the country’s tax law wrong and illegal and giving relief to companies that were acted against under the law. It ruled that the demand on Cairn was in breach of the “guarantee of fair and equitable treatment’’ under the India-UK bilateral investment protection treaty. The same court had turned down the demand of Rs 14,500 crore on telecom company Vodafone on similar grounds. In both cases, the court has awarded legal costs and damages to the companies. But the government does not seem to be ready to accept the rulings. It has appealed the Vodafone judgement and may challenge the Cairn ruling also.
The Hague court rulings came after multiple courts in India, including the Supreme Court, rejected the idea of a retrospective tax. The Income Tax department had made the tax demand on Vodafone which had acquired its Indian assets from Hutchison in 2007. The Supreme Court ruled in favour of Vodafone but to nullify the court order, the then finance minister Pranab Mukherjee brought about an amendment to the I-T Act in 2012 which enabled the tax authorities to impose a retrospective tax. The demand on Cairn was made in 2015 on the basis of the business reorganisation it had made in 2006. Retrospective taxation is wrong and unfair under any tax law. Taxpayers, whether individuals, companies or other entities, have the right to take their decisions and actions under existing laws. To change the law later and to make demands under it is to violate the basic principles of taxation.
The BJP had opposed the I-T Act amendment as “tax terrorism.” The then finance minister Arun Jaitley had told parliament, after the BJP came to power, that it would not use the retrospective tax provisions. He had also said that the government would abide by court judgements on the matter. Prime Minister Narendra Modi had endorsed it. But the government went back on its word and is now exploring all possibilities to avoid implementation of the most authoritative judicial pronouncements against it. It should realise that its posture is doing harm to the country's reputation as an investment-friendly country. Investors look for stability and predictability of the tax regime, continuity of policies, and adherence to rule of law as essential conditions for investment. If the government persists with its obdurate position on retrospective tax, the country will lose much more in investment than it hopes to gain from these two companies or others.