Ruling on Cairn assets: India needs rational tax policy for long term biz

Taxation policy in this country continues to be in the dark ages. There seems to be an impression that taxing of foreign entities can be carried out without regard to modern global treaties and norms. Much as revenue authorities would like to believe otherwise, India is not an island disconnected from the rest of the world. Formulating tax policies needs to be carried out with due regard to circumstances prevailing not just in this country but abroad as well. It cannot be over-emphasised that in an emerging economy, a system with assured and consistent tax laws is one of the most attractive for foreign investors. And India is certainly in need of large inflows of foreign direct investment to give an impetus to an economy that has floundered as a result of the pandemic since March last year.

Despite this dire need for higher investment inflows, the existing tax policy is bound to make most prospective investors take pause. The UPA government's decision to pass a retrospective tax legislation was certainly an ill-advised one. But the NDA government's subsequent action of ensuring that retrospective tax cases are followed up relentlessly, borders on the disastrous. In both the Vodafone and Cairn Energy cases, the government has acted in a manner that is detrimental to the country's long term interests, even as tax authorities take recourse to the argument of sovereignty giving them the right to tax these entities for past transactions.

It was after the decision of an international arbitration tribunal in favour of Cairn Energy last year that the Finance Minister Nirmala Sitharaman said that it was her duty to appeal as the ruling questioned the country's sovereign right of taxation. This led to the appeal against the arbitration even though it was clear the decision was not likely to be reversed in India's favour. The reasons were said to be that the ruling hinged on 'fair and equitable treatment' under the India-UK bilateral investment treaty while the Indian government felt the case fell outside the domain of the treaty. Besides, it was considered important to uphold the country's 'sovereign right' to tax entities.

Even though Cairn made overtures to reach a compromise agreement with the agreement, there is no indication that there were any serious moves in this direction by either side. Negotiations might have ensured that a middle ground was reached between the tribunal's order of 1.2 billion dollars (roughly Rs 8000 crore) to be paid to Cairn Energy and the tax demand of Rs 24500 crore made by the Indian government. No such solution was arrived at since December last year when the Hague-based tribunal's ruling had been made. The net result is the government is now faced with a French court's order freezing 20 of its properties valued at 20 million Euros in that country to ensure that Cairn is able to realise the tribunal award.

The unremitting pursuit of these past tax cases goes contrary to assurances made by the Modi government shortly after it assumed power. The late Arun Jaitley, a former Finance Minister had gone on record to assure that the policy of retrospective taxation would not be adhered to and had criticised the UPA for implementing the legislation. The original target for the law had been Vodafone which was asked to pay tax on the sale of the company from Hutchison Essar. The case had gone right up to the Supreme Court which ruled in Vodafone's favour in 2012. It was then that the retrospective tax legislation was passed, enabling opening up of transactions as far back as 1962.

The decision to pursue the past tax demand on Vodafone cannot be considered to have been in the national interest as it created serious financial difficulties for the company. This has raised the prospect of the company withdrawing from India which would leave the telecom sector with only two major players, Airtel and Reliance Jio. In other words, consumers would be left at the mercy of a duopoly capable of dictating terms to the market. It is surely not in anyone's interest to eliminate competition in the telecom sector, a situation which is detrimental for the general public.

It is time for the government to finally take a reasoned and logical approach to tax policy. It needs to factor in the long term impact of decisions taken on taxation issues rather than only consider short term revenue inflows. There is no doubt that the tax revenues from both the Cairn and Vodafone cases would enrich the exchequer in the short run. But in the long run, the decision to make tax demands on a retrospective basis does not provide the long term stability or consistency desirable in a country's investment framework.

It also does not enhance any country's reputation to take part in international arbitration proceedings and then fail to adhere to the rulings. In this context, it must be noted that freezing of assets to implement arbitration rulings has been carried out even here in regard to other countries. Thus any decisions taken now as far as Cairn Energy and other similar cases are concerned, must be taken only after a comprehensive overview of the entire scenario. Long term vision is the need of the hour on tax policies rather than keeping the focus on immediate gains.