The tribunal reasoned that India’s decision to retroactively apply the law, without a specific justification, created a new tax burden on a transaction that was not taxable at the time it was carried out, ie. in 2006(Shutterstock)
The tribunal reasoned that India’s decision to retroactively apply the law, without a specific justification, created a new tax burden on a transaction that was not taxable at the time it was carried out, ie. in 2006(Shutterstock)

India’s retrospective taxation blunder is still extracting heavy costs

In endeavouring to extract revenue through retroactive taxation that damages investor sentiment in the long run, India is being penny-wise and pound-foolish
By Prabhash Ranjan
UPDATED ON JAN 07, 2021 07:20 AM IST

A retroactive law is truly a monstrosity. Law has to do with the governance of human conduct by rules. To speak of governing...today by rules that will be enacted tomorrow is to talk in blank prose”. This quote by Lon L Fuller, an American legal philosopher, aptly summarises India’s retroactive tax misadventure.

In 2012, India amended the Income Tax Act retroactively to overturn the Supreme Court’s decision favouring Vodafone in a tax battle with the government. The 2012 amendment spooked foreign investors. It amended Section 9(1)(i) of the Income Tax Act, retroactively making it applicable to “indirect transfers”, ie. to the transfer by a non-resident of a share in a company incorporated abroad, if the share derived, directly or indirectly, its value substantially from assets located in India. One such “indirect transfer” was the 2006 internal corporate restructuring carried out by Cairn Energy. Armed with the 2012 amendment, the Indian government in 2015 imposed on Cairn a draft tax assessment of 10,247 crores for the corporate restructuring that took place in 2006.

Consequently, Cairn sued India before an investor-State dispute settlement (ISDS) tribunal alleging that imposition of taxes retroactively violates the India-United Kingdom bilateral investment treaty (BIT). The ISDS tribunal, in late December, ruled in favour of Cairn, holding India guilty of violating the fair and equitable treatment (FET) obligation of the India-UK BIT. The tribunal dismissed India’s argument that the 2012 amendment clarified the intent of Parliament regarding “indirect transfers” and that it was not retroactive.

The tribunal held that the 2012 amendment substantively changed the scope or operation of Section 9(1)(i) of the Income Tax Act. The tribunal also ruled that whether the 2012 amendment was constitutional or not has no bearing on India violating its treaty obligations because India’s liability has to be ascertained under international law. This is important because it ruptures the myth perpetuated by the defenders of the retroactive amendment that a law passed by Parliament that has not been declared unconstitutional does not violate India’s BIT obligations. The sovereign right to tax should be exercised in a manner consistent with international law.

The tribunal reasoned that India’s decision to retroactively apply the law, without a specific justification, created a new tax burden on a transaction that was not taxable at the time it was carried out, ie. in 2006. India robbed Cairn of its ability to plan its activities keeping in mind the legal consequences of its conduct. It disproportionately undermined the principle of legal certainty, which is one of the core elements of the FET standard specifically and of the rule of law generally. Hence, the tribunal ordered India to return over $1.2 billion to Cairn Energy Plc. This is the second instance of an ISDS tribunal admonishing India’s 2012 retroactive amendment of the Income Tax Act. A few months ago, another ISDS tribunal in Vodafone International Holdings v India found India guilty of breaching the India-Netherlands BIT for imposing taxes on Vodafone retroactively.

The 2012 amendment was a momentous error committed by the United Progressive Alliance (UPA) government. The National Democratic Alliance (NDA) government, on assuming office in 2014, had a great opportunity to correct this blunder by amending the law and making it prospective in application. This was expected because the Bharatiya Janata Party’s manifesto, cited by the Cairn tribunal, correctly criticised the UPA government for unleashing tax terrorism and uncertainty that deleteriously impacted the investment climate. However, the NDA government, instead of amending the law, relentlessly pursued the tax claims against Vodafone and Cairn Energy.

India has already challenged the Vodafone award. Presumably, it will do the same with the Cairn Energy award. In endeavouring to extract revenue through retroactive taxation that damages investor sentiment in the long run, India is being penny-wise and pound-foolish. The government should remember that promoting rule of law and safeguarding legal certainty are important drivers of foreign investment inflows.

Prabhash Ranjan is a senior assistant professor, South Asian University and author of India and Bilateral Investment Treaties: Refusal, Acceptance, Backlash
The views expressed are personal
SHARE THIS ARTICLE ON
Topics
app
Close
There is evidence to indicate that the PLA's work and engineering force deployed to upgrade infrastructure in occupied Aksai Chin moved back after completion of work last month
There is evidence to indicate that the PLA's work and engineering force deployed to upgrade infrastructure in occupied Aksai Chin moved back after completion of work last month

India should be wary of Chinese mind games

UPDATED ON JAN 13, 2021 12:31 PM IST
  • Withdrawal from the vast Tibetan and Xinjiang military region means little in an era of stand-off weapons and long-range missiles. The Chinese PLA has capacity to deploy troop divisions within a week with metalled roads and optical fibre cables up to the last military post and advanced landing grounds (ALGs) all along the LAC.
Close
President Xi Jinping, unconcerned about China's isolation, is expected to take steps that raise tensions ahead of the 100th anniversary of the communist party
President Xi Jinping, unconcerned about China's isolation, is expected to take steps that raise tensions ahead of the 100th anniversary of the communist party

Xi Jinping is preparing for a special birthday party. It has repercussions

UPDATED ON JAN 10, 2021 02:26 PM IST
  • The 100th-anniversary celebrations of the Chinese communist party would be projected as a strong counter to the so-called ‘century of humiliation’ that the Chinese empire and the Republic of China faced between 1839 and 1949 at the hands of western powers, Russia and Japan.
Close
Oli has been emboldened to stick to power even by breaking the party. In the process, the shallowness of Oli’s opportunistic and politically driven anti-Indian nationalism has been exposed(AFP)
Oli has been emboldened to stick to power even by breaking the party. In the process, the shallowness of Oli’s opportunistic and politically driven anti-Indian nationalism has been exposed(AFP)

What India should, and shouldn’t, do in Nepal

By SD Muni
UPDATED ON JAN 08, 2021 07:59 PM IST
Irrespective of whether Nepal has elections or witnesses the restoration of Parliament, a prudent course for India would be to let Nepal cope with its internal political mess
Close
India is currently the world’s third largest consumer of oil with growing demand and limited domestic supplies. Import in 2019-20 was 1.6 billion barrels and will increase as its economy expands.(REUTERS)
India is currently the world’s third largest consumer of oil with growing demand and limited domestic supplies. Import in 2019-20 was 1.6 billion barrels and will increase as its economy expands.(REUTERS)

To secure India’s energy future, create a sovereign wealth fund and invest

By Amit Bhandari
UPDATED ON JAN 07, 2021 07:43 PM IST
Norway is an example of prudent management of the windfall from high oil prices of the past, with which it set up a rainy day fund — now one of the most powerful and successful in the world. India is witnessing a similar windfall, in reverse, due to low oil prices — and needs to plan for the time when prices will be higher. That time is now.
Close
Health workers conduct a dry run of Covid-19 vaccination programme, New Delhi, January 6, 2021(Sanchit Khanna/HT PHOTO)
Health workers conduct a dry run of Covid-19 vaccination programme, New Delhi, January 6, 2021(Sanchit Khanna/HT PHOTO)

Devising a vaccine strategy for India

By Reuben Abraham and Anup Malani
UPDATED ON JAN 07, 2021 07:43 PM IST
Focus on allocation, distribution, financing, communication and certification
Close
The white supremacist disregard for the sanctity of law has been on the increase during the Trump presidency and the contrast with how Washington dealt with peaceful protests by African-Americans in recent months is illustrative of the deep racial fissures that still fester in US society.(AP)
The white supremacist disregard for the sanctity of law has been on the increase during the Trump presidency and the contrast with how Washington dealt with peaceful protests by African-Americans in recent months is illustrative of the deep racial fissures that still fester in US society.(AP)

January 6: A black day for US democracy

By C Uday Bhaskar
UPDATED ON JAN 07, 2021 07:41 PM IST
The erosion of democracy in the US, led by a defeated president, emboldened by his white supremacist base, will have both domestic and geopolitical consequences
Close
The shutdown of courts across India provided an opportunity to adapt to digital modes of working(Sonu Mehta/HT PHOTO)
The shutdown of courts across India provided an opportunity to adapt to digital modes of working(Sonu Mehta/HT PHOTO)

Ensure access to justice in a post-Covid world

By Leah Verghese
UPDATED ON JAN 07, 2021 07:20 AM IST
Any move towards the online functioning of courts must account for the digital divide in India
Close
Great cities and societies are not those that unquestioningly preserve everything from the past. They evolve and add new things while retaining the best from the past
Great cities and societies are not those that unquestioningly preserve everything from the past. They evolve and add new things while retaining the best from the past

The new architecture of a new India

PUBLISHED ON JAN 06, 2021 08:23 PM IST
India needs iconic buildings for functional reasons, to reflect new aspirations, and move past the colonial legacy
Close
The tribunal reasoned that India’s decision to retroactively apply the law, without a specific justification, created a new tax burden on a transaction that was not taxable at the time it was carried out, ie. in 2006(Shutterstock)
The tribunal reasoned that India’s decision to retroactively apply the law, without a specific justification, created a new tax burden on a transaction that was not taxable at the time it was carried out, ie. in 2006(Shutterstock)

India’s retrospective taxation blunder is still extracting heavy costs

By Prabhash Ranjan
UPDATED ON JAN 07, 2021 07:20 AM IST
In endeavouring to extract revenue through retroactive taxation that damages investor sentiment in the long run, India is being penny-wise and pound-foolish
Close
It should be clear that the UP Prohibition of Unlawful Conversion of Religion law infantilises Indian citizens, reduces them to the level of subjects, and authorises State intrusion into the most personal of domains, that of individual conscience.(AFP)
It should be clear that the UP Prohibition of Unlawful Conversion of Religion law infantilises Indian citizens, reduces them to the level of subjects, and authorises State intrusion into the most personal of domains, that of individual conscience.(AFP)

Eliminate State and social interference in matters of conscience

By Gautam Bhatia
PUBLISHED ON JAN 05, 2021 06:52 PM IST
The UP conversion law is unconstitutional. But the debate does not end with this one law, as it also replicates many existing provisions from other laws, which have been left standing for too long. India cannot call itself a constitutional democracy until social interference in matters of conscience is eliminated from its laws, once and for all.
Close
Farmers during their protest against the new farm laws, New Delhi, January 3, 2021(PTI)
Farmers during their protest against the new farm laws, New Delhi, January 3, 2021(PTI)

Understanding the rationale of farm protests

By Vijay Inder Singla and Aadil Singh Boparai
UPDATED ON JAN 06, 2021 06:13 AM IST
We need an empathetic government with a moral compass to urgently find a solution to the satisfaction of the farmers. Engaging in dilatory tactics and subterfuge will further exacerbate the growing trust deficit between the farming community and the Centre.
Close
By standing up militarily to China on the Himalayan borders, India also made it possible for smaller nations at the receiving end of Chinese aggression to envision the possibility that subservience to China is not the only option(ANI)
By standing up militarily to China on the Himalayan borders, India also made it possible for smaller nations at the receiving end of Chinese aggression to envision the possibility that subservience to China is not the only option(ANI)

The Delhi-Beijing battle in South Asia

By Harsh V Pant
UPDATED ON JAN 06, 2021 06:13 AM IST
China’s influence has grown, but contrary to conventional narrative, it is not necessarily ‘winning’. India has retained its focus
Close
Facebook Chairman and CEO Mark Zuckerberg testifies at a House Financial Services Committee hearing in Washington, US, October 23, 2019(REUTERS)
Facebook Chairman and CEO Mark Zuckerberg testifies at a House Financial Services Committee hearing in Washington, US, October 23, 2019(REUTERS)

Silicon Valley is in for a rough ride

By Vivek Wadhwa & Tarun Wadhwa
PUBLISHED ON JAN 04, 2021 08:21 PM IST
The days of regulators prioritising innovation over compliance may be over. The traditionally warm relationship between the Democratic Party and Big Tech is becoming contentious
Close
Covid-19 has taught all governments many lessons. But the most important one will be this: The strength of our social safety net will determine the heights the Indian economy will scale.(PTI)
Covid-19 has taught all governments many lessons. But the most important one will be this: The strength of our social safety net will determine the heights the Indian economy will scale.(PTI)

Only a strong social security net can ensure economic growth

By Jasmine Shah
UPDATED ON JAN 04, 2021 09:13 PM IST
The economic response of the Aam Aadmi Party government in Delhi has focused primarily on the poor and created the closest equivalent of a universal social safety net anywhere in India
Close
This undated handout photo obtained on October 6, 2020, from the University of California Los Angeles (UCLA) shows US astronomer and professor Andrea Ghez. Roger Penrose of Britain, Reinhard Genzel of Germany and Andrea Ghez of the US won the Nobel Physics Prize on October 6, 2020 for their research into black holes(AFP)
This undated handout photo obtained on October 6, 2020, from the University of California Los Angeles (UCLA) shows US astronomer and professor Andrea Ghez. Roger Penrose of Britain, Reinhard Genzel of Germany and Andrea Ghez of the US won the Nobel Physics Prize on October 6, 2020 for their research into black holes(AFP)

Will physics un-gender itself in the new decade?

By Prajval Shastri
PUBLISHED ON JAN 04, 2021 08:18 PM IST
Physicists need to internalise that being allowed to follow one’s passion at taxpayers’ expense is a privilege. All accomplishments are a consequence of that privilege, and from that follows the responsibility to correct the injustices.
Close
SHARE
Story Saved
OPEN APP