Unfavorable rulings by international arbitration tribunals in the cases of UK telecommunications group Vodafone and oil producer Cairn Energy prompted the Union government to table the Tax Laws (Amendment) Bill in the Lok Sabha , seeking to overturn retroactive tax provisions introduced in 2012. It’s a welcome move long overdue, and what turned out to be the proverbial straw was a French court order allowing Cairn Energy to seize 20 Indian government assets in central Paris, including luxury apartments intended for the stay of visiting personalities, to recover a portion of $ 1.72 billion (arbitration award plus costs and interest) owed by New Delhi.
If the NDA government has reiterated its opposition to retroactive taxation since taking office in 2014, it has relied on arbitration for too long, hoping against all hope for favorable judgments to resolve “inheritance disputes”. On December 21, 2020, an arbitral tribunal in The Hague rendered its award in favor of Cairn Energy Plc and Cairn UK Holdings Ltd. In another setback for the Indian government last year, The Hague Permanent Court of Arbitration ruled that India’s retroactive claim for Rs 22,100 crore as capital gains and withholding taxes imposed on Vodafone for a 2007 deal violated the fair treatment guarantee.
The protracted litigation was not only costly and time consuming, but also tarnished India’s reputation as an investor-friendly destination. It is hoped that the new legislation will usher in a fair and predictable tax regime and boost investor confidence, which is a prerequisite for getting the economy of the Covid-hit country back on track. India is ranked 63rd in the middle of the Ease of Doing Business Index, far behind other Asian countries such as Singapore, South Korea, Thailand, United Arab Emirates, Japan and China. Foreign investors have many options and they will not prefer countries where they are likely to face tax uncertainty and intimidation. The challenge for India will be to make optimal use of the new law to attract expensive investments.