The tax department has just delivered a reality check for all those who thought the foundation-stone-laying for the Mumbai-Ahmedabad bullet train on Thursday—by prime ministers Shinzo Abe and Narendra Modi—represents a new high in Indo-Japanese relations. Apart from the plethora of red tape that dogs many large Japanese investments in India, including the high-profile Delhi Mumbai Industrial Corridor Development Corporation, the taxman slapping a Rs 2,500 crore demand on Japanese telco DoCoMo—Business Standard has just reported this—shows just how unresponsive and unreformed India’s governance system continues to be. The tax demand adds salt to injury and, to that extent, is a signal to all investors to stay out of the country, and we are not even talking of those like Vodafone and Cairn that are victim to Pranab Mukherjee’s retrospective tax that even the NDA has not found fit to repeal or find any way to provide succour to affected investors. Much like Hotel California, it would appear, you can check out any time you like but you can never leave.
When DoCoMo invested Rs 14,500 crore in Tata Teleservices in 2009, it put in a stop-loss through an options clause—in case the JV failed to meet certain performance criterion, Tata agreed it would buy back DoCoMo’s equity at half the original value—the exchange risk was DoCoMo’s. RBI rules even at that time disallowed options, but firms were allowed to apply for permission. The RBI rule made sense since, while India had ceilings for foreign debt, some firms (in the real estate sector, primarily) were skirting this by disguising their loans as equity—the buyback clause in their contracts built in the interest rate. But with DoCoMo asking for just half its initial investment, and only after certain performance parameters were not met, it clearly didn’t fall in this category. Yet, when Tatas applied to RBI to buy out DoCoMo, the government turned it down—RBI passed it on to government because RBI chief was related to a senior Tata official. Later, when Tatas lost the case in London arbitration, the government and RBI argued against the award being enforced. Fortunately, the Delhi High Court took a progressive view and said foreign awards simply had to be enforced, and that is how Tatas paid DoCoMo.
A problem here was the London court awarded damages to DoCoMo for the Tata refusal to honour the contract and the taxman is arguing the damages paid are taxable since they represent an income for DoCoMo—had the payment been made by Tatas according to the original contract, the taxman would have treated is as a capital loss and not taxed it. It is possible the courts will rule in favour of DoCoMo eventually, but surely someone needed to apply their mind and examine the spirit of the contract and therefore the context of the arbitration award? The taxman is probably justified in arguing the damages are an income, but from an investors point of view, whether the Tatas paid damages or honoured their contract is really the same thing since the damages were awarded because the contract was not honoured. If this is the casual attitude towards investors from countries that India considers strategically important, you shudder to think about what happens to ordinary investors—both Cairn and Vodafone, of course, are living testimony to that.