Government had promised to waive all retrospective tax claims against corporates, in this case, Vodafone and Cairn, on these companies giving undertaking to withdraw all existing cases against India and also promises not to pursue legal costs for fighting law cases for last so many years.

India was fighting a long drawn out battle with two major multinational corporations over tax claims against them on the basis of the retrospective taxation provision which was formalised in the finance Bill of 2012.

Both the companies had own international arbitration against India on appeal from these two companies in The Hague and in Singapore. Only recently, a court case in France was awarded in favour of Cairn to attach all Indian government owned assets in the French jurisdiction as compensation for the companies against Indian tax claims and the costs for the legal disputes in connecting with these cases.

The arbitration awards were inconvenient and were proving to be a kind of economic ambush of India at unknown locations and at short notices.

But above all, these cases were proving to be embarrassment for the country and acted as a disincentive for foreign direct investors. These incidents of attachment of Indian assets and continuing throwing of darts were giving a bad image to India.

The provision for retrospective taxation was introduced by the then Pranab Mukherjee in his last budget as finance minister in 2012. It was felt that overseas companies had made huge capital gains on Indian assets when overseas investors holding these assets had sold these to others.

That is, if as an overseas investor you have been owning some assets within India and made an offshore deal for sale of these assets, the capital gains for the seller was subject to Indian taxation even though the transaction was held outside of India in other tax jurisdictions.

These claims were applied to two prominent overseas investors in India, Vodafone, which was engaged in telecommunications business in India, and on Cairn India Ltd, engaged in oil and gas operations in India. The claims against these companies were substantial.

The amounts claimed apart, the tax raised several issues in the minds of overseas investors. They were concerned over the fact that Indian tax authorities were empowered to levy tax on transactions made many years back, sometimes going back to 1961.

Any retrospect tax claims are controversial. It introduces an element of uncertainty in investor relationship with host countries. However, these also depend on the host country which is slapping the tax claims.

If China or the USA or even the United Kingdom had levied such claims on foreign direct investors, they could just as well have carried it thorough. No company in its senses would have gone on to challenge these claims and would have meekly subjected itself to these taxes.

In case of China, even minor conflicts with the Chinese authorities result in severe rulings against overseas investors. Some of the largest US tech giants have been subjected to harshest treatment on minor lapses in Chinese eyes and have promptly capitulated to Chinese arms twisting.

The entire issues turns on what economic might you have and how much is your ability to punish.

China apply bans intransigent companies from its huge markets and as a result the companies tend to submit. Even the German government has often capitulated to Chinese demands.

So much so, that German foreign policy was influenced by their economic calculations, even though Germany often tried to paint itself as the high priest of global human rights proponent and protector. Germany has conveniently overlooked Chinese treatment of Uighur Muslim minorities, and even avoided towing the policy prescriptions of the champions of global human rights proponents.

One of the largest car makers in the world, Volkswagen, is virtually held hostage to China and their outlandish demands because over 40 per cent of the market for tis products is in China.

Foreign direct investors have to give in to Chinese demands for technology transfer, even in sensitive dual-use areas, as a precondition for operations in the Chinese markets.

Google, as a major technology company of the United States, was formulating artificial intelligence tools for face recognition and similar aids, which were used for identifying Uighur Muslims or other dissidents in China. The company had reluctantly agreed to stop developing these aides after massive protests in US and even by the company’s own employees.

Sports goods makers have fallen in line with Chinese demands regarding mention of Taiwan as an independent country. Whichever company had mentioned Taiwan as a country, had to kowtow before Chinese demands as they were immediately shut out from Chinese markets.

The amendment bring the retrospective taxation was ill advised and ill conceived, no doubt. The retrospective taxation was possibly the only tax innovations to flow from Pranab Mukherjee during his many stints as finance minister of the country since the days of Indira Gandhi. And ever since, it has embarrassed the country and exposed its vulnerabilities.

But it has also shown how much pulled India pulled. In particular, in grim contrast to China we stand no chance as of now. The withdrawal of the provisions for retrospective taxation vindicates this weakness. It is a practical solution but still it rankles. (IPA Service)