The persistence of retrospective taxation has already cost a great deal to India’s reputation.
Imagine the Indian ships in international waters being seized—not by pirates or the navy of China or Pakistan but by a private company, and that too legally. Unfortunately, this is not a hypothetical scenario but a distinct possibility.
Cairn Energy has threatened to seize Indian assets abroad if New Delhi doesn’t comply with the verdict of the Permanent Court of Arbitration at The Hague, which had ruled that the British oil explorer could not be subjected to retrospective taxation. Hopefully, that won’t happen because both sides have started negotiations; Cairn Energy chief executive officer Simon Thomson met Finance Secretary Ajay Bhushan Pandey on 18 February to address the issue, but the threat cannot be ruled out. Things have come to such a pass because of the Finance Ministry’s obsession with revenue maximisation.
As if the coronavirus-induced decline were not enough, the deep pink state—comprising the socialists and statists entrenched in the system—are hurting the cause of recovery. Peddling the discredited policy of revenue maximisation, along with another abomination called retrospective taxation, is a most effective way of damaging growth. And that is exactly what they are doing.
The same kind of people led the country to another but similar quagmire—the Vodafone tax case. Their view is that India should extract Rs 22,000 crore from the company despite an adverse ruling from the international court and an earlier one from our own Supreme Court. If the Narendra Modi government accepts this view, the ramifications would be calamitous and far-reaching for India’s attractiveness as an investment destination and its gross domestic product (GDP).
The deep pink state can sound nationalistic but its decisions are invariably against the best interests of the nation. A few months ago, The Times Of India had quoted unnamed Central government officials who claimed that the Vodafone order from the international court “impinges on its sovereign right to tax”.
Another official, also unnamed, sounded positively jingoistic: “These tribunals acting like super states and decide on what’s in the exclusive domain of Parliament or courts.”
This is a blend of mendacity and duplicity: following international laws and respecting rulings by international courts doesn’t compromise sovereignty. In 2014, a United Nations tribunal gave a verdict favouring Bangladesh over India in a sea boundary row. India not only honoured the ruling but also said, “The settlement of the maritime boundary will further enhance mutual understanding and goodwill between India and Bangladesh by bringing to closure a long-pending issue.”
Giving up land has no impact on sovereignty, but foregoing a fraudulent claim has! The chicanery of the deep pink state is staggering. This also flies in the face of the well-established definition of nationhood; land is an integral part of a state and nation; money is not. For money is transient but territory is permanent.
The Vodafone saga began in May 2007 with the British corporation buying a 67% stake in Hutchison Whampoa for a consideration of $11 billion. Vodafone bought Hutchison’s mobile telephony business and other assets in India. Four months later, the Indian government demanded Rs 7,990 crore in capital gains and withholding tax from Vodafone, arguing that it should have charged the same from Hutchison as tax deducted at source before making a payment.
Vodafone legally challenged the demand notice, and the case went up to the Supreme Court. In 2012, the apex court decided in favour of Vodafone. The matter should have ended there, but taxmen managed to convince the then Finance Minister, Pranab Mukherjee, to disregard the highest court of the land and undo its ruling by bringing in an ordinance—which he did.
Mukherjee remained stubborn regarding the retrospective tax demand. He thundered in Parliament: “I would like to be guided either by a double tax avoidance agreement or domestic tax law. There cannot be a situation where somebody will make money on an asset located in India and will not pay tax either in India or to the country of its origin.” Unfortunately, Parliament let the government override the Supreme Court, and the ordinance became law.
It is unfortunate that the Modi regime accepted the spurious and fallacious logic proffered by Pranab Mukherjee. The late statesman had many virtues, but international taxation was not one of them.
It would be even more unfortunate if the pseudo-nationalistic logic is allowed to prevail after the international court verdict. Even if we accept that the international court’s decision undermines our sovereignty, how could India convince the world about its own Supreme Court’s stance? Did that too want to undermine the nation’s sovereignty? And are the true nationalists found only in the Finance Ministry?
The persistence of retrospective taxation has already cost a great deal to India’s reputation. Had India not continued with this vile practice (and adopted a business-friendly approach), lakhs of crores would have come to the country, created millions of jobs, and brought much more than what the taxmen want to extract from Vodafone and Cairn. Tax revenue is maximized by augmenting economic activity, not by squeezing business houses.
Non-acceptance of the verdicts by the international court will further hurt our chances of attracting investment, both foreign as well as domestic. What the nation needs is investment, not tax terrorism which now comes in the guise of nationalism.
Ravi Shanker Kapoor is a freelance journalist.