The Ministry of Finance has tabled a bill in parliament to abolish retrospective taxation. Introduced in 2012 by the previous coalition government led by the Congress Party, the draconian overbreadth allowed the Treasury to go back 50 years and impose capital gains levies wherever ownership had changed. of hands overseas but the business assets were in India.
Vodafone Group Plc was billed for 20,000 crore rupees ($ 2.7 billion) for purchasing, in 2007, a Cayman Islands-based investment firm that controlled the Indian wireless activities of Hong Kong tycoon Li Ka-shing. India’s own Supreme Court had ruled that the deal went beyond national taxation. The Congressional government, then faced with a major telecom licensing scandal, attacked the British operator by retrospectively changing the tax code.
Tax officials wasted no time in rolling their juggernaut along the newly paved road to perdition. Cairn Energy Plc underwent a restructuring in which the British energy explorer transferred ownership of its Indian oil field in 2006 to Cairn India Ltd. to prepare for the IPO of the local unit. The $ 4.3 billion tax demand arrived in March 2015. By then the government in New Delhi had changed, but not – as would become clear later – the state mentality.
Embarrassment ensued. Last Christmas, the Edinburgh-based company won a $ 1.2 billion international arbitration award to redress losses suffered after India’s foreclosure of its shares in Vedanta Ltd. (with which Cairn had merged the Rajasthan oil field, India’s largest onshore discovery in two decades), kept the dividends and sold the shares. Vodafone had won earlier, when a panel in The Hague rejected the tax demand, saying it violated fair treatment under India’s investment protection pact with the Netherlands, and awarded costs to the telephone company.
While retrospective taxation has tarnished India’s image, its stubborn refusal to accept arbitration awards has further tarnished it. Cairn is seeking coercive action against New York Indian sovereign assets in Paris, putting a future major power in the same league as Venezuela, Qatar, Lithuania and Tunisia. It remains to be seen whether passage of the tax amendment bill will lead to a fair settlement of Cairn’s claims. A 26% overnight rise in the company’s London-listed shares suggests investors are bullish.
Vodafone’s fortune in India, however, declined. The fiscal surplus and the price war triggered by the entry into telecoms of petrochemical czar Mukesh Ambani in 2016 thwarted the local unit’s plans to go public. It merged with metal tycoon Kumar Mangalam Birla’s wireless service in 2018, but found itself on the wrong side of the state again. This time around, the government waved a court-blessed demand for $ 7.8 billion as its share of Vodafone Idea Ltd.’s past revenue. With $ 30 billion in debt, the phone company is on the brink of a precipice. If the service provider with 280 million subscribers were to go bankrupt, India would gain even more of a bad reputation as being seen as the most dangerous telecommunications market in the world.
Cairn can expect to see real money from the removal of retrospective taxation, but not Vodafone. Unless there is a solution to the existential challenge facing his Indian unit, CEO Nick Read is unlikely to provide significant rescue capital. To this extent, the late decision of the Ministry of Finance to resolve the error of the previous government becomes a public relations tool to limit the damage: “Look, we have done our best. “
Do they have? Retrospective taxes are only one facet of arbitrary state action. Multinationals that have committed billions of dollars, attracted by the potential India’s market of 1.4 billion people, have many more legal minefields awaiting them. Walmart Inc. is fighting a proposed consumer protection regulation that threatens to undermine the business model of Flipkart, the local e-commerce site it bought for $ 16 billion in 2018. Facebook Inc’s WhatsApp service . has sued the Indian government over rules that it says will destroy end-to-end message encryption.
From fintech and online games to ridesharing and after-school tutoring, Beijing is taking much tougher measures to bend the private sector to its will. But in India, the state appears to be targeting global companies, reducing competition and turning the economy into a monopoly for local capitalists. Telecom is set to become a two-horse race, led by Ambani. One company, Adani Airport Holdings Ltd., now accounts for 25% of all passenger traffic and 33% of air cargo. Mastercard Inc. was barred from taking on new customers for alleged data-tracking breaches, ceding the market to Visa Inc. and RuPay, a local network that state-owned banks have been asked to promote.
Had the Modi government removed retrospective taxation after taking office in 2014, that would have been enough to signal India’s intentions to keep the economy open, transparent and rules-based. Now it will take a lot more work. Some of that could be done by the judiciary, such as the Indian Supreme Court’s decision on Friday to allow enforcement of an arbitration order from Singapore to India, granting major relief to Amazon.com Inc. L he emergency arbitrator, at Amazon’s request, stopped the $ 3.4 billion sale of cash-strapped Indian retailer Future Retail Ltd. at Ambani’s Reliance Industries Ltd.
But the political executive will also have to fight for a more level playing field. Getting rid of retrospective taxation is a welcome first step.