Given that British Prime Minister Theresa May appears set to take up Vodafone and Cairn retrospective tax cases in India, Prime Minister Narendra Modi will do well by offering an amicable settlement of these two big cases.
Prime minister Narendra Modi’s assurance to the UK businessmen during his visit to the country in November last year that India will not resort to retrospective taxation raised hopes of a speedy resolution of the Vodafone and Cairn tax disputes.
After one year, though, the two cases are still languishing in the arbitration process, and there is no early resolution in sight despite Cairn approaching the International Court of Justice.
In fact, India has maintained its stance of not allowing tax issues to be taken up under the bilateral investment promotion and protection treaties and has gone ahead and restructured its bilateral investment treaty (BIT) model by excluding tax issues from it.
It is quite logical, therefore, that resolution of these two cases is expected to be high on the agenda of British Prime Minister Theresa May’s India visit from November 6 to 8.
How significant it is for improving the confidence of large foreign investors is clear from Cairn Plc Chief Executive Simone Thomson’s interview to The Economic Times in which he said that the company had represented before both the governments and is expecting a breakthrough now, through May.
While Cairn is facing a retrospective tax demand of Rs 29,000 crore, which is related to the business restructuring transaction that had been approved by the government; Vodafone is contesting the Rs 20,000-crore tax dispute associated with its $11.2-billion Hutchison’s India business acquisition in 2007.
Thomson is right in pointing out that the tax case is symbolic of the uncertainty in the business atmosphere in the country and the company, though confident of winning the international arbitration, wants to settle the issue amicably.
He is obviously aware of the fact that the arbitration can be protracted and take a long time, and even if the award goes its favour, there is no guarantee that the Indian government will implement it considering the experiences in White Industries-Coal India and Antrix-Devas cases.
The best way, in this backdrop, to resolve the two cases is to clearly, do it with active involvement of both the governments.
Vodafone has already held talks with the finance ministry to get to a workable solution that may lead to waiving of the penalty and interest and, in Cairn’s case, pre-dominantly, it’s a question of Indian government accepting that the transaction is not taxable.
To be fair to the current government — that these cases are still lingering despite BJP’s promise to end tax terror in the 2014 Lok Sabha election, in itself, explains these decisions are politically tough ones, but PM Modi will do well by showing the required courage now as this may be one of the biggest boosters to India’s ease of doing business ranking.