IAS Gyan

Daily News Analysis

Learning to let go: On retro taxes

25th December, 2020 Economy

Context: India must ensure policy stability, and not rely on retrospective laws to levy tax

  • The Permanent Court of Arbitration at The Hague ruled in favour of energy firm Cairn Plc over a retrospective tax demand worth ₹24,500 crore pursued by India’s taxmen since 2014.
  • It has ruled that the tax levy, pertaining to a corporate reorganisation exercise undertaken in 2006-07, falls foul of the India-U.K. bilateral investment pact.
  • The timing could not have been worse for the government — expiry of a three-month deadline to contest a similar retrospective taxation case lost against Vodafone this September.
  • But unlike the telecom case, where the government would only need to fork out around ₹80 crore if it were to concede defeat, this verdict includes a sharp $1.4 billion payable as damages to Cairn.

  • The damages arise from tax authorities’ decision to take by force and subsequently sell the company’s shares, and freeze dividend payments as well as tax refunds, to recover the disputed tax dues even as the arbitration process was under way.
  • This outcome has repercussions, not in the least for an arbitration plea filed over the same tax demand by Cairn’s parent firm, Vedanta, whose verdict is awaited.
  • Second, the fiscal implications of such a large payout to Cairn when the exchequer is cash strapped, may have galvanised the government’s mind about challenging the Vodafone verdict after much dithering.
  • Ostensibly, because it cannot take a different stance on two similar cases, the Centre has now filed an appeal in the Vodafone matter in Singapore.
  • A similar appeal too can be expected on Cairn.
  • Finance Minister has repeatedly asserted that India retains the sovereign right to levy taxes. The arbitrators do not seem to be disputing that.
  • The fact is that this government has asserted from the outset it is not in favour of retrospective legislative changes.
  • Losing the arbitrations in the most-watched cases under a troublesome law that has hurt India’s investment credibility.
  • The government aspirations to rope in global investments must be matched by ensuring policy stability and creating a robust regulatory framework.

About Permanent Court of Arbitration (PCA)

  • It is an intergovernmental organization located in The Hague, Netherlands.
  • It is not a court in the traditional sense, but provides services of arbitral tribunal to resolve disputes that arise out of international agreements between member states, international organizations or private parties.
  • The cases span a range of legal issues involving territorial and maritime boundaries, sovereignty, human rights, international investment, and international and regional trade.
  • The PCA is constituted through two separate multilateral conventions with a combined membership of 122 states.
  • The organization is not a United Nations agency, but the PCA is an official United Nations Observer.