Column: Tackling the Vodafone tax dispute

May 27 2014, 04:25 IST
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SummaryArbitration or repeal of the retrospective arrangement, either way the new government faces a difficult choice

A day before the outcome of the 2014 general elections was out, the outgoing government put the ball in the new government’s court by withdrawing the conciliation offer made to Vodafone. It is now up to the Narendra Modi-led government to resolve the dispute that has generated unprecedented negative press for the Indian law-makers after they retrospectively amended the tax law to override a well-reasoned verdict of the Supreme Court.

In this article, I have taken a leaf out of the January 2012 judgement, wherein the apex court observed that such levy of tax would tantamount to capital punishment for capital investment, and that it lacked the authority of law.

Reactive retrospective amendment carried out in the Finance Act of 2012, just weeks after the verdict, has drawn strong reactions from foreign and domestic investors alike, particularly over the certainty and stability of India’s tax regime. Non-implementation of the expert committee’s recommendation in administering the retrospective law was seen as another instance of indecisiveness and lack of sensitivity towards investor sentiments. In general, the past few years have witnessed a provocative and aggressive stance by the tax administration leading to a multitude of disputes in a weak economy contributing to an environment of ‘tax-uncertainty’. For the first time in India’s history, certainty of tax laws became an integral part of the opposition’s manifesto which included labels such as ‘tax-terrorism’ and ‘tax-adventurism’, ascribed to the outgoing regime. The previous government’s actions were lead by its obsession to reduce the fiscal deficit, at any cost, forcing it to raise unreasonable tax demands to shore up its books by simply increasing the number and size of tax audits and assessments.

The new government has a challenge of sorts. It shall have to balance the need for fiscal tightening and achieving the goal of tax governance by upholding the “Rule of Law”, which can prevail when there exists a sense of responsibility and mutual respect between the three arms of the government—the executive, the judiciary and the legislature. In the short-term, addressing perceptions that have gripped investors is most critical.

Besides maintaining status-quo—an unlikely scenario in my view—I see limited options for the new government to take Vodafone, or a Vodafone-like dispute, to its logical conclusion. It could either back up its pro-business agenda by repealing the retrospective amendment or it could proceed with the arbitration proceedings initiated by Vodafone under the India-Netherlands bilateral investment treaty(BIT).

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