Twin blows in three months

In exactly three months, the government has lost two international arbitration cases, this time against energy company Cairn over a retrospective tax claim. India has been told to pay Cairn Rs 8,000 crore. The sum is limited to the revenue lost by Cairn when its assets were impounded and sold by the tax authorities, and its dividends confiscated, alongside interest. This comes after the government lost another arbitration against Vodafone over retrospective taxation in September this year. In the Cairn case, the arbitration Bench — including the arbitrator nominated by the Indian government — unanimously decided that the tax demand violated the bilateral investment treaty between India and the UK.

The question is where the government will go from here. There is, of course, one wise course: To accept that the attempt to claw back taxation retrospectively, even if justified, has been a legal and public-relations failure since the beginning. Arun Jaitley as finance minister admitted as much on several occasions. It is puzzling therefore that, in spite of this stated position, the government continued to pursue the retrospective tax demands for all they were worth, instead of reaping the benefits of the positive sentiment created by deciding to move on. In this case, the government has said that it is studying its options. The only option it has is to rely on other courts setting themselves up above international arbitration guaranteed by treaty. Even an appeal to the Singapore appellate body is in itself a dangerous and foolhardy move, and should not be encouraged by the government. The unreliability of the Indian legal system when it comes to dispute resolution is a major stumbling block in terms of attracting global capital to invest in India. If the government seeks to use its own domestic courts to overrule an arbitration process that it has participated in, the storm of negative sentiment will be like the retrospective tax amendment all over again.

It is time for the government to not just accept with good grace that it has lost this legal battle, but take measures to ensure that it is not put in such a position again. Rather than turning against bilateral investment treaties — which it has shown every sign of doing — it must recognise that these are essential components of a coherent foreign investment strategy. It must recommit publicly to never using retrospective tax amendments, and that it was wrong to pursue every route to delay pay-outs of the money that was impounded in the past. And it must make arrangements to ensure that both Cairn and Vodafone are satisfied that the arbitration decisions have been respected. The deadline for appealing the Vodafone arbitration award in Singapore is expiring on Thursday, and the government must let it pass without further activity.

The opportunity has come to finally close the long chapter on retrospective tax that has done such damage to India’s reputation as an investment destination. An investment-friendly business environment would increase economic activity and help raise more revenue over time for the government. It is to be hoped that tax officials’ desire to deny their defeat and to try and hang on to legally untenable revenue finds an unsympathetic hearing from politicians in the finance ministry.

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