The Vodafone tax case, involving a retrospective demand of over Rs 22,000 crore as capital gains and withholding tax, has become a quagmire for India. But such is the logjam effected by the deep pink state—comprising the socialists entrenched in the system—that getting extrication has become extremely difficult. On Friday, the Permanent Court of Arbitration at The Hague decided unanimously against India’s retrospective demand imposed on the British telecom giant for a 2007 deal, calling it a “breach of the guarantee of fair and equitable treatment.”
The sordid saga began in May 2007 with Vodafone buying a 67 per cent stake in Hutchison Whampoa for a consideration of $11 billion. Vodafone bought Hutchison’s mobile telephony business and other assets in India. Four months later, the Indian government demanded Rs 7,990 crore in capital gains and withholding tax from Vodafone, arguing that it should have charged the same from Hutchison as tax deducted at source before making a payment.
Vodafone legally challenged the demand notice, and the case went up to the Supreme Court. In 2012, the apex court decided in favor of Vodafone. The matter should have ended there, but taxmen managed to convince the then finance minister, Pranab Mukherjee, to disregard the highest court of the land and undo its ruling by bringing in an ordinance—which he did.
Mukherjee remained stubborn regarding the retrospective tax demand. He thundered in Parliament: “I would like to be guided either by a double tax avoidance agreement or domestic tax law. There cannot be a situation where somebody will make money on an asset located in India and will not pay tax either in India or to the country of its origin.” Unfortunately, Parliament let the government override the Supreme Court, and the ordinance became law.
Eight years have passed since then. Numerous experts have expressed their displeasure over the retrospective taxation provisions. This episode has hugely reduced the attractiveness of India as an investment destination. Yet, neither the Congress-led United Progressive Alliance regime nor the Narendra Modi government has done away with the provision. In fact, there isn’t even any comprehension of the monstrosity of the act: government itself disregarding the highest court.
Worse, the same thinking that led to the monstrosity persists even today: governments change, not their attitudes. The deep pink state that hurt the nation’s prospects in 2012 is also doing the same today. “The Indian government will contest the Vodafone arbitration award, but it will also reach out to international pension and insurance funds keen to invest in the country in order to reassure them, said a top official source,” Business Standard reported yesterday.
As we mentioned earlier, the logjam is the result of machinations of the deep pink state. It is aided by taxmen whose sole purpose is revenue maximization, even at the expense of the country’s image. What they don’t realize, or don’t want to realize, is the fact that revenue can be maximized not by squeezing businesses but by making the country an attractive investment destination. More investment leads to brisker economic activity, higher growth, faster employment generation, and consequently more revenue.
It is time the Finance Ministry accepted The Hague verdict and buried the case forever. It won’t cost the nation anything—and will earn a lot of goodwill among investors.