The retrospective tax amendment should never have been introduced by the government in the first place, given that it has achieved precious little in nearly a decade, Prabhash Ranjan, Senior Assistant Professor at South Asian University’s Faculty of Legal Studies, told Moneycontrol. However, the move will still assure global investors of predictability in India’s tax policy, he stressed.
Ranjan, who is the author of ‘India and BITs’, also spoke about what to expect from India’s trade negotiations, many of which are stuck over bilateral investment treaties (BITs). Edited Excerpts:
Q. What kind of impact will India’s reputation face globally, having lost successive domestic and international rulings and then changing tax rules?
A. While doing away with retrospective taxation is a significant development that the investor community would surely welcome, it leaves the world confused about what India ultimately achieved in these nine long years. The law should not have been amended retrospectively in the first place. The NDA government should have corrected the blunder of the UPA government as soon as it took office in 2014 instead of waiting for these disputes to play out.
Q. Will the decision help in ending the hostility between Vodafone, Cairn and the government on the retrospective taxation issue if the companies agree to the government's terms?
A. It depends on whether Vodafone and Cairn Energy accept the conditions given in the Bill. If both are happy getting back the principal amount without interest and waiving their right to bring claims then it might bring the disputes to an end. However, if they would also like the government to pay the interest and other costs as ordered by the two ISDS tribunals, then the disputes will continue. This is especially true for Cairn Energy because they stand to lose around $0.5 billion — the additional amount they could have got as per the arbitration tribunal's order, in the form of interest and other costs.
Q. Does the latest decision still leave the government open to legal action by other corporates on related matters?
A. Unlikely unless foreign investors would like to claim interest on taxes already paid, due to the retrospective taxation.
Q. Given how India is currently focused on pulling in investments and global value chains, especially from China, what impact do you see this having on investment flows?
A. This move will definitely lift investor sentiment. But whether it would result in greater investment inflows is difficult to answer because investment inflows do not depend on just one factor/law.
Q. Will the latest decision require a change in India’s model BIT framework?
A. No. India’s model BIT excludes taxation measures from the purview of the investment treaty. So, India can continue with the same provision if it is convinced that taxation matters should not be arbitrated before investment treaty arbitration tribunals.
Q. What impact do you think the latest move will have on ongoing free trade agreement negotiations, such as the ones with the EU, UK and US? All of these remain hamstrung over India’s insistence on keeping the BIT model as the basis of investment rules... foreign nations are protesting India prioritising domestic arbitration over international ones.
A. It would have a positive impact in terms of sending out a signal that India is serious in offering a certain and predictable legal and taxation framework to foreign investors. I do not think India’s stand on taxation in BITs is going to change due to this amendment. So, the question of taxation in the investment treaty negotiations will continue to be an important issue.
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