June 01, 2023

'Retrospective Tax' Does Not Pass Muster, Vodafone Not Required To Pay The Demand Of Rs 20000 Crore

By Sunil Garodia
First publised on 2020-09-25 20:45:15

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Editor-in-Chief of indiacommentary.com. Current Affairs analyst and political commentator.

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The retrospective tax got a huge kick on the backside today when an international court in The Hague ruled that it violated the investment treaty between India and Netherlands in the case between the Indian government and Vodafone. Consequently, India lost the case and Vodafone is not required to pay nearly Rs 20000 crore that was levied as interest and penalties with retrospective effect when the Income Tax department had ruled that the company had to pay these amounts on its acquisition of the Indian assets of Hutchison Whampoa (Hutch) in 2007.

Vodafone had disputed that and had even won the case in the Supreme Court. But the then UPA II government had changed the rules and made it applicable from retrospective effect. India Inc. had protested this 'retrospective tax'. It amounted to changing the goal posts after the match had started and it was an unethical thing to do. If Vodafone had known beforehand that its acquisition of Hutch would entail an additional payment of Rs 20000 crore as interest and penalties, it would have negotiated the deal differently.

Fairness and transparency in taxation demands that even if the government stands to lose substantial revenue, rules must not be changed with retrospective effect. It makes a country a hostile investment destination if the government keeps changing tax rules to fleece investors, especially when the rule was not there when they first came in. The 'retrospective tax' was widely criticized then but the then government stuck to its guns. Perhaps losing the arbitration case now will drill some sense in the bureaucracy and they will not come up with such fancy stuff in future.

In India wants to be the preferred destination for companies looking to move out of China post the pandemic, it has to spell out all its policies in black and white with a caveat that rules will not change with retrospective effect to harm done deals. The difficulty overseas companies face in doing business in India is one of the biggest reasons that despite the hype around 'Make in India' the country is not seeing even 5 percent of what was invested in China. Although the NDA government is trying, it is not enough. We have to junk outdated thinking and the propensity to change rules at the drop of a hat. On the ease of doing business, we are nowhere even near to the countries competing with us to lure the companies that are expected to look for investment destinations if and when they move out of China.