vodafone-wins-international-arbitration-against-india-in-14200-crore-tax-dispute-case

 

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Context: The Permanent Court of Arbitration at The Hague ruled that India’s retrospective capital gains tax imposed on the British telecommunication company Vodafone for a 2007 deal was “in breach of the guarantee of fair and equitable treatment”and it must cease seeking the dues from Vodafone. 

Background : ‘Retrospective taxation case’

  • In 2007, Vodafone signed a $11 billion deal to buy the Indian mobile assets from Hutchison Whampoa. 
  • The government said Vodafone was liable to pay capital gains taxes on the acquisition, which the company contested.
  • India had claimed a total of ₹279 billion ($3.79 billion), including about $2 billion in tax, as well as interest and penalties.
  • In 2012, Vodafone challenged it in the Supreme Court.
  • The SC ruled that Vodafone Group’s interpretation of the Income Tax Act of 1961 was correct and that it did not have to pay any taxes for the stake purchase.
  • But the government. circumvented the Supreme Court’s ruling by amending the Income tax Act 1961 to impose capital gain tax on indirect sale of Indian asset including all transactions done in previous years. 
  • Under this provision tax notices were sent to Vodafone, Shell, Cairn energy and other firms. The amendment was criticised by investors globally.
  • In 2014, Vodafone initiated arbitration proceedings against India.
  • Vodafone Group then invoked Clause 9 of the Bilateral Investment Treaty (BIT) signed between India and the Netherlands in 1995.
    • In 1995, India and the Netherlands had signed a BIT to ensure that companies present in each other’s jurisdictions would “at all times be accorded fair and equitable treatment”.
    • British Multinational Vodafone invoked it as its Dutch unit, Vodafone International Holdings BV, had bought the Indian business operations of Hutchinson Telecommunicaton International Ltd. 
    • This made it a transaction between a Dutch firm and an Indian firm.
    • Article 9 of the BIT says that any dispute between “an investor of one contracting party and the other contracting party in connection with an investment in the territory of the other contracting party” shall as far as possible be settled amicably through negotiations.

Retrospective taxation

  • Retrospective taxation allows a country to pass a rule on taxing companies from a time behind the date on which the law is passed.
  • Countries use this route to correct any anomalies in their taxation policies that have, in the past, allowed companies to take advantage of such loopholes. 
  • While governments often use a retrospective amendment to taxation laws to “clarify” existing laws, it ends up hurting companies that had knowingly or unknowingly interpreted the tax rules differently.

Capital gains tax

  • Any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain. 
  • Section 45 of Income Tax Act, 1961 provides that this gain or profit comes under the category ‘income’, and it is payable in the year in which the transfer of the capital asset takes place. 
  • It can be short-term or long-term. 

Capital assets

  • Land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewellery are a few examples of capital assets. 
  • This includes having rights in or in relation to an Indian company. It also includes the rights of management or control or any other legal right. 
  • The short-term capital asset is a capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer. 
  • Therefore, a capital asset held by an assessee for more than 36 months immediately preceding the date of its transfer is a long-term capital asset.

The tribunal judgment

  • One of the major factors for the Court of Arbitration to rule in favour of Vodafone was the violation of the BIT and the United Nations Commission on International Trade Law (UNCITRAL).
  • The tribunal said the government’s demand is in breach of “fair and equitable treatment” and it must cease seeking the dues from Vodafone. 
  • It also directed India to pay 4.3 million pounds ($5.47 million) to the company as compensation for its legal costs, one of the sources added.

Implications:

  • Pending cases: India is entangled in more than a dozen such cases against companies, including Cairn Energy, over retrospective tax claims and cancellation of contracts. The exchequer could end up paying billions of dollars in damages if it loses.
  • Tax avoidance by multinationals is a major cause of concern as complex tax laws provide a loophole for the companies.
  • Ease of doing business: Retrospective taxation creates an unstable tax regime which hurts the interests of foreign investors and creates a favourable business environment.

Certainty of law is must for a stable tax regime. Reform of taxation laws and Double Tax Avoidance Agreement agreements will go a long way in attracting foreign incvtsmenst in India.

The Bilateral Investment Treaty

  • A stable political and legal environment, assurances against taking away of the investment value through legislative or administrative acts, transparent public policy measures, and speedy access to justice are strong guarantees for foreign investors.
  • A bilateral investment treaty (BIT) between two countries plays a key role in offering these guarantees on an international plane. 
  • In 2015, India replaced the investor-centric 2003 Model BIT with a State-centric model. India terminated BITs with 58 countries in 2017.
  • The Model BIT stipulates that the aggrieved investor should use all local remedies as well as negotiations and consultations initiating arbitrations against the host State. 
    • Investors can use outside remedies only five years after resorting to all domestic arrangements.

United Nations Commission on International Trade Law (UNCITRAL)

  • The United Nations Commission on International Trade Law (UNCITRAL) was established as a subsidiary body of the U.N. General Assembly (UNGA) in 1966.
  • The organization is responsible for helping to facilitate international trade and investment.
  • The Tribunal constituted in accordance with the UNCITRAL Arbitration Rules 1976 is seated at the Hague, Netherlands, and proceedings are administered by the Permanent Court of Arbitration.

 

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Q)  One of the most controversial legal issues in India has been with respect to the power with the Government to make retrospective amendments in taxing laws. Critically examine the issue of retrospective taxation. (250 words)