Was it really? If the PM’s statement is to be believed what prevented the government, which amended the Indian constitution to abrogate the controversial Articles 370 and 35A to remove the special status of J&K and conversion of the erstwhile state into two Union Territories — Jammu and Kashmir and Ladakh — to get the UPA government’s retrospective tax amendment act deleted and withdraw all pending cases against foreign investors, including Vodafone and Cairn Energy?

The government has lost the retro-tax cases in national and international courts. Yet, it continues to pursue them with vigour for unclear reasons. It seems to have become an ego fight for India to defend its parliamentary supremacy to enact law, good or bad. Why is the Modi government in a bind under the 2012 Act, permitting imposition of retrospective tax? What is the interest of some lower-level tax officers and official legal experts to misguide the government on the merit of the retrospective tax act, even after their successive failures in the courts of law? The country has hopelessly spent crores of rupees in foreign exchange to desperately fight these cases abroad. Every time India loses, it makes international news, tarnishing the country’s hard-earned image as a growing investment-friendly nation.

Ironically, Vodafone is the largest foreign investor in India. The British telecom giant infused Rs. 47,700 crore fresh equity capital in its Indian arm, making it the biggest foreign direct investment in the country. After the merger with Idea, a Aditya Birla group company, Vodafone Idea has been under severe financial pressure, partly due to certain government actions and huge retrospective tax demand. The financial stress of Vodafone has been, in a way, to the advantage of a new comer, Reliance Industries (RIL) of the Mukesh Ambani group, in the field.

The original Reliance outfit in telecommunications, RCom, is faced with bankruptcy proceedings. Anil Ambani-led RCom’s pre-tax loss is well over Rs. 9,000 crore. RCom owes over Rs. 57,000 crore to debtors. On the other hand, Cairn Energy gave India its biggest single oil discovery. In March 2015, the government slapped with a tax demand of Rs 10,247 crore over alleged capital gains Cairn made by reorganising its India operation into a separate subsidiary for listing on local stock exchanges.

Vodafone and Cairn are not the only instances in which retrospective tax demands have been aggressively pursued by the government. Sanofi, a French pharmaceutical major, received a demand in 2010 for a transaction undertaken in 2009 to acquire a majority stake in Shanta Biotechnics Ltd valued at approximately Rs.38 billion. The acquisition was made through sale of the parent company of Shanta Biotechnics, ShanH SAS France, to Sanofi. Prior to the acquisition, ShanH SAS France was owned by Groupe Industriel Marcel Dassault. In 2013, the Andhra Pradesh High Court decided in favour of Sanofi and specifically rejected the applicability of retrospective amendments to countries where double tax avoidance agreements were applicable.

The government had lost an international tax arbitration case against Vodafone in September, 2020. The court ruled the government, seeking Rs 22,100 crore in taxes from telecom giant Vodafone using retrospective legislation, was in "breach of the guarantee of fair and equitable treatment" guaranteed under the bilateral investment protection pact between India and the Netherlands. In the Cairn Energy case, a three-member arbitration tribunal in The Hague unanimously overturned India’s retro-tax demand and asked India to return the value of shares sold, dividend seized and tax refund withheld.

This together with interest and cost comes to $1.72 billion. With India refusing to pay, Cairn registered the award in nine jurisdictions including the US, the UK, Canada and Singapore and has started a process to recover the money from government-owned entities. India challenged the arbitration tribunal award. The finance ministry said the tribunal "improperly exercised jurisdiction over a national tax dispute that the Republic of India never offered and/or agreed to arbitrate.” India had seized and sold shares of Cairn in its erstwhile India unit, confiscated dividend dues and withheld tax refunds to recover the tax demand it had levied two years after the amendment of the law that gave it powers to levy tax retrospectively.

While India’s chances of winning these retro-tax cases look remote, its stubborn attitude may be seen as a dogged pursuit of power even at the cost of its growing investor-friendly nation image. India has taken bold steps to invite foreign investment in e-commerce and insurance. It even plans to hike FDI limit in the pension sector to 74 percent. Though some of the latest changes in the FDI rules are meant to lend greater clarity, their constant meddling can spoil the purpose. According to a global study by Morningstar Inc, India and the U.S. are the world’s two most investor-friendly markets in terms of best practice for portfolio disclosure.

Despite the pandemic, India has been able to attract large foreign investment in both the primary and secondary markets. The country’s FDI inflow rose 15 percent in April-January, 2020-21, to US$ 72.12 billion. The inflow is the highest ever for the first 10 months of any financial year. Japan was the top investor. Foreign portfolio investors continue to pour money into Indian markets. This may be the right time to dump the retro-tax regime unleashed by the previous regime. The Modi government missed its earlier chances to repeal the amendments and withdraw the demands, but it has another opportunity to put the entire matter to rest. While it has already challenged the Vodafone award, it should not litigate the matter further should the challenge fail. Likewise, it should refrain from challenging the Cairn award and withdraw the appeal in the Sanofi case. (IPA Service)