Tax Reforms

Lessons to learn from Vodafone ruling

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Retrospective legislation

Mains level : Paper 3-Implications of Vodafone tax case ruling

Context

  •  An Investor-State Dispute Settlement (ISDS) tribunal has ruled that India’s imposition of tax liability amounting to ₹22,000 crore on Vodafone is in breach of India-Netherlands bilateral investment treaty obligations.

Background of the case

  • This case arose after the Indian Parliament in 2012 amended the Income Tax Act.
  • As per the amendment, income deemed to be accruing to non-residents, directly or indirectly, through the transfer of a capital asset situated in India is taxable retrospectively with effect from April 1, 1962.
  • This amendment was carried out to override the Supreme Court ruling in favour of Vodafone.
  • This amendment dented India’s reputation as a country governed by the rule of law, and shook the faith of foreign investors.

Key lessons from Vodafone case

  • 1) All the three organs of the Indian state — Parliament, executive, and the judiciary — need to internalise India’s BIT and other international law obligations.
  • These organs need to ensure that they exercise their public powers in a manner consistent with international law, or else their actions could prove costly to the nation.
  • 2) India should learn that being a country that values the rule of law is an important quality to win over the confidence of foreign investors and international goodwill.
  • 3) It is likely that the government might challenge the award at the seat of arbitration or resist the enforceability of this award in Indian courts alleging that it violates public policy.
  •  It would mean that India does not honour its international law obligation.
  • 4) This ruling might have an impact on the two other ISDS claims that India is involved in with Cairn Energy and Vedanta on the imposition of taxes retrospectively.
  • 5) It is quite possible that India might use this award to further harden its antagonistic stand against ISDS and BITs.
  • India unilaterally terminated almost all its BITs after foreign investors started suing India for breaching BITs.
  • But the fact is that this case and several others are a result of bad state regulation.
  • 6) This decision shows the significance of the ISDS regime to hold states accountable under international law when in case of undue expansion of state power.
  • The case is a reminder that the ISDS regime, notwithstanding its weaknesses, can play an important role in fostering international rule of law.

Consider the question “What were the issues involved in the Vodafone tax case? What are the implication of Investor-State Dispute Settlement ruling for India?”

Conclusion

If government is serious about wooing foreign investment, India should immediately comply with the decision.

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