While Vodafone Plc has finally won its arbitration against the Union government’s 2012 retrospective tax amendment, if past is precedent, it could be several years before the case is finally over. Just last week, the Supreme Court ruled turned down the government’s appeal against an arbitration that Vedanta-Videocon won – the two were awarded $476-million – way back in January 2011!
Nor was this the only case of the government challenging global awards that have gone against it. Reliance Industries won an award, in 2016, in the Panna-Mukta-Tapti case and this was challenged; so was the arbitration award that, in 2018, ruled against the government’s demand of $1.6-bn from Reliance. The $672-mn award in favour of Devas – in its damages claim against Isro’s Antrix – has also been challenged. Indeed, the government has got so used to challenging arbitration awards, it even challenged the award in favour of Japanese firm DoCoMo even though it had no stake in the case, and the Tatas who lost the case were quite happy to pay up.
The Vodafone case was wrong in so many ways, indeed it is the perfect symbol of just how treacherous it is to business in India even today. To begin with, the retrospective tax was brought to reverse a Supreme Court ruling against the taxman and in favour of Vodafone; the taxman had slapped a penalty on Vodafone, arguing it should have deducted withholding taxes when it bought out Hutch’s stake in the Indian telecom venture for $11-bn. If this wasn’t bad enough, when the retrospective tax was introduced, then finance minister Pranab Mukherjee never even made a mention of such a momentous change in his budget speech.
And despite the BJP campaigning against the UPA’s ‘tax-terror’, when it came to power, it did nothing to strike the retrospective tax from the statute. While then finance minister Arun Jaitley sought to balance the need to strike off the statute with the fear of being accused of striking a deal with Vodafone – and others hit by the tax, like Cairn Energy of UK – this wasn’t very effective either. Jaitley sought to fix matters by saying that, while the government would not use the retrospective tax, it would go by court/arbitration rulings in the existing cases; since it would be a court ruling, no one would be able to accuse the BJP of cutting a deal. As it happened, when firms like Vodafone and Cairn tried to take the government to arbitration under various bilateral investment treaties, the government argued that the cases could not be arbitrated under the treaties!
This was, though, not the end of Vodafone’s troubles since, as this newspaper has documented regularly, India’s telecom policy has been quite anti-investor, and this was the case even before Reliance Jio came in with its predatory prices; for a company that spent $16-bn to buy out the existing promoters of what was then Hutch, apart from what it has since invested in the India operations, this was a sad blow. Indeed, it is this experience that has led it to say that it will not pump in any more money into the Vodafone-Idea joint venture.
The retrospective tax, it has to be said, didn’t make a material difference to the actual cash Vodafone had since it was not asked to make any payments against the taxman’s demands; it is important to point out that the arbitration award, even if Vodafone had lost, has no bearing on the India joint venture, as the tax liability is on Vodafone Plc.
Cairn Energy of UK that produces a fourth of India’s oil production – it first discovered oil in Rajasthan in January 2004 – wasn’t so lucky. It first reorganized its India business in 2006 – the Indian assets, held by overseas firms, were transferred to the India firm prior to an IPO. The firm was then sold to Petronas in 2009 and to Vedanta in 2011 and Rs 3,700 crore of capital gains taxes were paid on the two transactions. At no point did the taxman claim taxes on the 2006 operations; not surprising since no money accrued to anyone in 2006.
Yet, in January 2014, eight years after Cairn Energy’s pre-IPO group reorganization, the taxman used the retrospective tax – of 2012 – to slap a tax. Unlike Vodafone, Cairn Energy’s shares worth $1-bn were attached by the taxman, along with $400-mn of dividends that Vedanta was to pay it. So, if Cairn Energy wins its arbitration, the government will also have to shell out $1.4-bn in damages.
Even more worrying, Vodafone and Cairn are not the only examples of the high-handedness of the tax authorities. A CAG report, out this week, points out that, between 2014-15 and 2017-18, the taxman did ‘search and seizures’ of a total of 1,417 companies; the CAG took a sample of 185 companies out of this for a detailed study. CAG found that, in the case of 84 groups, the taxman had added Rs 24,965 crore to the income of these firms based on the documents that were found in the search and seizures; yet, the CAG says, when these cases were argued in the CIT(A) and ITAT courts, less than a fourth of this amount was accepted as kosher.
Indeed, since total tax refunds are around 14-15% of direct tax collections every year, it does appear that the taxman could also be arm-twisting people to make extra tax collections.
Another interesting statistic that emerges from the CAG reports tabled in Parliament this week is the fact that, while the taxman keeps asking for more taxes – these are then disputed by assessees – the tax department has admitted that just 11-12% of these arrears are collectible! And yet, the taxman has no compunctions in adding to the disputed taxes. Between 2013-14 and 2014-15, while total tax collections rose 1.9 times, disputed arrears rose 1.8 times (see graphic). What makes this worse, as the Economic Survey for 2017-18 pointed out, is that the taxman’s track-record in winning cases is remarkably poor. Till March 31, 2017, in the case of direct taxes, the Survey said, the taxman petitioned the ITAT/Cestat in around 88% of the cases, but it won just 27% of the cases. It fared even worse in the high courts and won just 13% of the cases; the success rate rose to 27% in the Supreme Court.
Indeed, the fact that around 90% of total direct tax collections are made voluntarily by the assessee – through TDS, advance taxes and self-assessment taxes – makes you wonder about how good a job the taxman is doing in terms of augmenting tax revenues. This is not to say the taxman should arbitrarily ask assessees to pay more taxes – as we’ve seen, the majority of such attempts fail in the courts – but that its overall strategy and performance be relooked thoroughly.