The order passed by the Permanent Court of Arbitration at The Hague upholds evidence placed by Vodafone Inc against tax levied by India on the global telecom major.
This will have multiple implications, both for India and the corporate. First, it is no doubt a major embarrassment for the Indian government. Second, it could trigger a slew of tax-related cases currently being heard in Indian courts, landing before the International Court of Justice (ICJ).
The order is an alert, if not caution for the Indian government. It is a sine qua non that the government takes seriously that it is losing more cases than it is winning in tax-related matters in the legal battles.
According to Economic Survey 2017-18, in tax-related issues it has a success rate of just 27 percent in the Supreme Court. It is an indication that there is an inherent flaw in the current laws and policy. Under such circumstances, it is challenging to realise the tax that is due to the government, as per law.
Change is inevitable. Certainly not because a foreign court has rejected the Government of India’s argument, but because we are entering a new world order. Also, to become a global leader, change is a must. In that vein, it is heartening that the Bharatiya Janata Party (BJP)-led government set up a committee that has identified 1,824 old laws. About 1,428 archaic central Acts and about 75 laws have been repealed.
The same effort in tax-related laws is highly desirable.
Globally, all governments undertake a review of their policy, tax, legal, and labour laws. It is not about which political party is in power, but this is about India as a country being evaluated by the world as a future investment destination. This is especially important in the current scenario when world nations are looking for a promising investment/manufacturing destination outside China.
Both Opposition and government should work together to ensure that India has a set of new rules and regulation. A more transparent tax system that complements a well-defined policy to attract investment.
Good efforts don't go waste. Recently, India was ranked 63rd out of 190 countries' in terms of World Bank's ‘Ease of Doing Business’. The amendments to the Arbitration and Conciliation Act, Specific Relief Act and Commercial Courts Act, must have been taken up by the evaluators, preparing the Doing Business Report 2019-20 to give India a better rank.
It will augur well for India if the legal reforms are undertaken on priority. We live in a connected and interdependent world. It is in the interest of every government that domestic and foreign investment flows in unhindered, the industry grows, and its citizens get the best employment opportunities.
That is only possible when there is well-oiled legal machinery to complement the rules and regulations. For example, the Insolvency and Bankruptcy Code (IBC) in 2016, was a brilliant intervention, but soon it exposed the inadequacy of the legal system to manage the massive backlog of companies going through the National Company Law Tribunal (NCLT) for liquidation or resolution. Several companies used the loopholes to slow down the process of reforms and defeated the purpose.
Let's look at the Vodafone case a bit closer. A law that was questioned fought in courts and India's reputation put at stake. The dispute between Vodafone and the Indian tax system is a colossal waste of time, energy, money and reputation.
Can this be avoided in future?
The telecom sector in India is the most vibrant of all the industries that were opened up to private sector participation. Despite the legal battles, policy upheavals and challenges to the service industry, telecom technology holds the future of the economy.
An economy that will be built with technology at the centre needs a robust legal system that has a strong foundation of justice and transparency. Adam Smith, the 18th-century Economist, perhaps gave a prologue to the whole Vodafone case. In one of the lectures in 1755, he said, "Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things."
The challenges are manifold in dealing with the order of the Permanent Court of Arbitration in the Vodafone case. It may not be easy for the government to appeal in appropriate courts challenging the order. However, an attempt to initiate an introspection of existing laws that hamper business growth will go a long way in establishing India as a global leader.
M Rajendran is a senior business journalist. Views are personal.
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