[Nigam Nuggehalli is the Dean, School of Law, BML Munjal University. He is the author of a monograph on international taxation from an Indian perspective]
On Friday last week, the Permanent Court of Arbitration at The Hague unanimously decided that India’s imposition of a retrospective tax on Vodafone was in violation of the India-Netherlands Bilateral Investment Treaty (BIT) that required the Indian Government to treat its investors fairly and equitably. Once again, the Vodafone tax dispute was in the headlines after nearly a decade, and the Indian Government was being criticised for its tax policies. How did we come to such a state of affairs and where do we go from here?
In the past ten years, there have been three significant trends in international taxation. First, public opinion is getting increasingly impatient with multinational companies (MNC) using the lacunae in domestic tax legislation to reduce their tax liabilities. Second, tax authorities worldwide have begun to counter tax avoidance measures more aggressively than before. Finally, governments are now prepared to change the fundamental rules of taxation in order to keep up with MNC tax planning, culminating in an OECD-G20 led reframing of international taxation under the Base Erosion and Profit Shifting (BEPS) project. All three trends came together in a spectacular fashion in the Vodafone case.
In the Vodafone case, there was an attempt, successful at the highest judicial level, to transfer Indian assets on a tax free basis by utilising foreign companies. The case was based on an interpretation of section 9 of the Income Tax Act, 1961, and this reading of the tax legislation was acquiesced to by the Indian Supreme Court. The Supreme Court could have adopted a harsher approach towards creative tax planning, but even the Indian Government would agree that that there was nothing egregious about the decision. There were two plausible views on interpreting a piece of tax legislation and the Supreme Court happened to side with the taxpayer. Yet, the Government went ahead and enacted a retrospective legislation specifically designed to override the Supreme Court decision.
In trying to turn back time, the Government might well be right in thinking that a big fish in the corporate world got away with a clever tax strategy concocted by expensive tax lawyers. But in a democracy wedded to the rule of the law, the Government cannot be unfair towards investors who it perceives as being unfair. This sounds counterintuitive, but is in fact at the heart of the rule of law project. We do not treat alleged wrongdoers differently only because we are upset with their wrongdoing. Everyone in a democracy is entitled to be treated fairly and equitably. Indeed, the question of fairness and equal treatment acquires greater significance when the government imposes sanctions, either financial or physical, on people under its remit. This essentially democratic idea is not a mere play on words, but is enshrined in the bilateral investment treaties (BIT) that India has signed with various countries. In the one relevant to the Vodafone dispute, the India-Netherlands BIT has promised investors fair and equitable treatment by the government, not fair and equitable treatment only if the government believes the investor is acting fairly.
The Government of India enacted a vaguely worded legislation meant to trump the Supreme Court decision and dressed up its attempt as an explanation or clarification of what the legislation has always been trying to say. Of course, this wasn’t the case, and the arbitration decision last Friday vindicates Vodafone’s position that the rug was pulled from under its feet through a legislative intervention. As an aside, the Government’s amendment of the various definitional provisions in the income tax legislation (relating to ‘transfer’ and ‘property’) is likely to lead to several interpretational headaches in the future beyond the immediate Vodafone decision because of the imprecise language used in the legislation.
What is the future of the Vodafone dispute after the arbitration decision? I suspect that there are going to be few more legal twists and turns before we come to any kind of resolution. The arbitration has indicted not just a particular government action but a piece of parliamentary legislation and the Indian Government might take the line that the decision questions the sovereignty of India, and is therefore illegitimate on that account. If Vodafone were to enforce the arbitration decision in India, it will have to necessarily depend on the Indian judiciary for this purpose, and this will lead to more delays and legal wrangling. There are other arbitrations pending where the tax enforcement under the retrospective legislation has been challenged and therefore this issue will simmer for some more time.
In a macabre symmetry of sorts for Vodafone, it is now locked in a dispute with the Union Government on two fronts, tax and telecom licence fees. Both disputes involve crores of rupees and both, despite Supreme Court interventions, are nowhere near a resolution yet.
– Nigam Nuggehalli