India must fight Vodafone arbitration award

 There is jubilation in many circles over the award at the Permanent Court of Arbitration at the Hague going against India in the matter of the retrospective tax demand of Rs 22,100 crore made by India on Vodafone.

We asked for it, many seem to be saying.  Amending the law retrospectively to deal with the Supreme Court judgement, as the UPA government did, was wrong. Retrospective amendment of laws gave a jolt to foreign investors and is bad in principle.The Modi government must now accept the arbitration award: that would send the right signals to international investors.

Rubbish! As senior lawyer Biswajit Bhattacharya argues in BS today, the SC judgement was wrong, the retrospective amendment was right and India's tax demand on Vodafone is appropriate. 

The issue is capital gains on assets located in India. If the assets are transferred between parties located outside, are capital gains on such assets taxable or not? Bhattacharya points out that if the SC judgement were to be accepted, any two individuals could avoid tax by transferring assets located in India between themselves simply by acquiring non-resident status!

Bhattacharya also raises an important question about how Vodafone approached the matter of acquiring the telecom assets:   

The SC’s ruling that India’s tax authorities had no territorial jurisdiction over this transaction leaves several questions unanswered, given that Vodafone approached the FIPB in India before the transaction. Why did Vodafone await FIPB’s approval before remitting funds from Cayman Islands to Hong Kong if India had no territorial jurisdiction? The Central Board of Direct Taxes (CBDT) is also located in the same North Block where the FIPB office was. How could CBDT, and through CBDT the tax authorities, then not exercise territorial jurisdiction, if the FIPB could?

Bhattacharya also dismisses the contention that retrospective amendment of laws is an evil that governments must avoid:

Critical comments about retrospective amendment are misplaced. It is a settled law that Parliament can legislate prospectively as well as retrospectively, even in fiscal statutes. Many such amendments have been carried out before. Retrospective amendment to FCRA (Foreign Contribution Regulation Act) was carried out by Parliament only to bail out the Bharatiya Janata Party and the Congress, to nullify a judgment of Delhi High Court, which held both political parties guilty of violating the FCRA norms. Why this hue and cry only for Vodafone?

The so-called impact on foreign investor sentiment is bunkum. In the decade since the initial High Court judgement favouring the government, FDI and FII flows have kept rising. It's not as if the retrospective amendment has had foreign investors running away from India.

Bhattacharya seems to suggest that the government was wrong to accept international arbitration. One option appears to be to go on appeal in Singapore. It's for legal experts to suggest other options.

However, we need to be clear that if we are to retain respect as a sovereign nation, the retrospective amendment to the law done by Parliament must be upheld. It's worth recalling that the late Justice JS Verma  had said of the Vodafone judgement that it is one of three judgements "which are best forgotten or allowed to pass" (the other two being the Habeas Corpus case judgement during the emergency and the judgement in the JMM bribery case).  

See also the hard-hitting interview with academic Surajit Mazumdar.