With Vodafone’s victory in international arbitration
in the Netherlands, the long and sorry saga of “retrospective taxation” should ideally be brought to a close. In 2007, the Indian income tax authorities had served a notice for Rs 7,990 crore in capital gains tax on Vodafone
for its purchase of Hutchison India’s assets — which were routed through a tax haven, the Cayman Islands. The Anglo-Dutch telecom major fought the demand all the way to the Supreme Court, where it received a favourable judgment. In a move that shocked investors, however, the next Union Budget effectively closed the loophole that Vodafone
had used in its deal — with retrospective effect. By 2016, the tax demand and interest had more than doubled to over Rs 22,000 crore. In that time, Vodafone
had already appealed to international arbitration, saying that investments in India were governed by the Indo-Dutch bilateral investment treaty (as well as the India-UK bilateral investment treaty). It is this case that the telecom major has won, with the arbitrators saying the government’s behaviour violated the “fair and equitable treatment” clause in the bilateral investment treaty.
There will be no immediate outgo for the government or income for the multinational Vodafone plc from this decision aside from the relatively small legal costs that the government must pay the company — about Rs 85 crore. In the years since, the multinational’s India arm has merged with Idea and started calling itself Vi. Shares of this company shot up in response to news of the arbitration; but the fact is that the company and the sector have been treated as a punching bag by the Indian state for so long that in spite of such arbitration
it is burdened with debt, spectrum fees, and pre-tax losses. Whatever the merits of the original deal, there is no doubt that this is a poor way to treat companies that have brought money into India, invested in its infrastructure, and sought to provide an essential service to consumers. It is no surprise that investors are no longer queuing up to put money in infrastructure in India the way that they were in 2006.
What is more worrying is the initial rumble from within the finance ministry and the broader government that they intend to pursue the demand, claiming various violations of parliamentary privilege, Indian judicial supremacy, and so on. All that needs to be remembered is that Arun Jaitley, as finance minister, gave an assurance in Parliament in his first Budget speech in 2014 that the government would allow the legal processes in these cases to reach their logical conclusion. To now seek to overturn or ignore an arbitration
judgment would compound the initial 2012 mistake — and at a time when India is equally in need of foreign investment. It is to be remembered that the consequences of the loss of faith in India on the part of international investors were dire for financial flows and for stability on the external account. At a time of crisis, such concerns should be at the top of the finance ministry’s mind. It must not seek to prolong this agonising saga. Instead, it should learn from it and avoid situations that lead to such arbitration — as well as re-examine its position on current arbitration.