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Last week, Cairn Plc (now merged with Vedanta) introduced its $1.2 billion win in damages in opposition to India in a world arbitration, in a case pertaining to the levy of retrospective tax by the Indian authorities in 2012. This comes simply after the ruling in September 2020 pertaining to retrospective tax, in favor of Vodafone. These awards are a results of India retrospectively amending its taxation legal guidelines via the Finance Act of 2012, allowing tax authorities to reopen and/or examine transactions from 2006 for evasion of capital positive aspects tax. The modification was made to offer a go-by to the Indian Supreme Court’s ruling in favor of Vodafone whereby the tax demand raised by the tax authorities on Vodafone was expressly quashed for “not being backed by law.” The authorities of India, led by Prime Minister Narendra Modi, regardless of having a number of alternatives to settle the disputes, selected not to take action. In reality, the present authorities has determined to problem the Vodafone award regardless of specific assurances on the contrary made by then Finance Minister Arun Jaitley.
The Disputes
The Vodafone dispute traces its origin to the $10.9 billion acquisition of a 67 p.c stake in Hutchison Essar by Vodafone in May 2007. The acquisition additionally included the telecommunication enterprise of Hutchinson in India. Consequent to the acquisition, Vodafone obtained a requirement of 79.9 billion Indian rupees in capital positive aspects and withholding tax from Indian tax authorities. The tax authorities maintained that Vodafone was required, beneath legislation, to deduct tax at supply previous to affecting the fee of consideration to Hutchinson. Vodafone contested the discover and the matter lastly reached the Bombay High Court. The courtroom dominated in favor of the tax authorities and directed Vodafone to clear the demand. Vodafone appealed the choice, and a three-judge bench of the Supreme Court led by the chief justice of India, dominated in Vodafone’s favor and quashed the demand discover.
The judgment particularly famous that the demand of almost 120 billion Indian rupees by means of capital positive aspects tax would quantity to imposing capital punishment for capital funding because it lacks the authority of legislation. Unimpressed by the ruling, the Indian authorities amended the Income Tax, 1961, retrospectively, to overturn the judgment of the Supreme Court. The modification allowed tax authorities to retrospectively tax transactions, together with Vodafone’s stake in Hutchison. Consequently, tax authorities demanded that Vodafone pay 200 billion Indian rupees towards again taxes on capital positive aspects, together with curiosity and penalties. Said demand led to Vodafone invoking the Netherlands-India bilateral funding treaty (BIT) with the intention to deliver the dispute to adjudication through a world tribunal.
The Cairn dispute arose in 2006-07 when Cairn UK transferred shares of Cairn India Holdings to Cairn India as a part of its restructuring for an preliminary public providing (IPO). Prior to the IPO, Indian companies have been routed via a Cayman Islands-based subsidiary of Cairn UK. Subsequently, in 2011, the enterprise of Cairn India was bought to the Vedanta group with Cairn India retaining a 9.8 p.c share in Vedanta. In 2014, tax authorities alleged that Cairn UK had made capital positive aspects of round 245 billion Indian rupees via the restructuring in 2006-07 and promptly raised a tax demand foundation on the retrospective modification of 2012. The tax authorities barred switch of 9.8 p.c of Vedanta’s shares to Cairn India pending adjudication of the demand, inflicting extreme monetary issues for Cairn India that led to 40 p.c of its India employees being laid off.
In 2015, Cairn UK gave a discover of dispute beneath the India-U.Okay. BIT and requested for arbitration. While the arbitration was pending, in 2017, the tax authorities seized round 20 billion Indian rupees in dividends and tax refunds to the accounts of Cairn India. The tax authorities additionally hooked up the Cairn India shares and auctioned them to recuperate the alleged tax due. The dispute has lastly resulted within the award by the worldwide tribunal whereby India has been ordered to pay 80 billion Indian rupees to Cairn for violations of its worldwide commitments beneath the India-U.Okay. BIT. Interestingly, it’s an unanimous award whereby the arbitrator appointed by India additionally dominated in Cairn’s favor.
However, Cairn and Vodafone will not be the one situations by which such calls for, which have been categorically negated by Supreme Court in Vodafone’s case, have been made and proceed to be aggressively pursued by the tax authorities. French pharmaceutical main Sanofi obtained an identical demand in 2010 for a transaction undertaken in 2009. In 2009, Sanofi acquired a majority stake in Shanta Biotechnics Ltd valued at roughly 38 billion Indian rupees. The acquisition was affected via sale of the guardian firm of Shanta Biotechnics Limited, ShanH SAS France, to Sanofi. Prior to the acquisition, ShanH SAS France was owned by Groupe Industriel Marcel Dassault. In 2013, the Andhra Pradesh High Court determined in favor of Sanofi and particularly rejected the applicability of retrospective amendments to nations the place double tax avoidance agreements have been relevant. The tax authorities filed an enchantment in opposition to the judgment, which is pending earlier than the apex courtroom and there seems to be no indication of withdrawal of the enchantment. Similar issues pertaining to entities from Belgium and Mauritius are additionally pending. However, because the BITs with France, Belgium, and Mauritius stand terminated by India, it stays to be seen whether or not these entities will deal with notices of arbitration, if any.
Inconsistencies in Policy-making
In 2014, when Modi took workplace, the hope was that not solely would the retrospective amendments be rolled again but in addition that pending tax calls for can be withdrawn. Clearly, the retrospective amendments had backfired: the gathering in income beneath the amendments was zero, and losses when it comes to overseas direct funding and overseas institutional traders (FII) have been substantial. However, the federal government refused to withdraw the retrospective amendments and merely promised to not increase any additional calls for beneath the amendments. The authorities maintained that every one pending calls for can be permitted to be resolved via acceptable authorized processes and that India would honor the arbitral awards, as soon as delivered. However, not solely did the federal government take a opposite stand earlier than the Supreme Court within the Sanofi matter, arguing that the retrospective tax amendments have been legitimate and relevant; it additionally initiated coercive motion in opposition to Cairn whereas the arbitration proceedings have been pending. Further, latest stories counsel that India has challenged the Vodafone award in Singapore in a whole departure from its earlier promise to just accept the award. While the possibilities of India succeeding on this problem are restricted, its impact on overseas traders could also be extra damaging.
Another necessary facet to be highlighted is the sheer lack of consistency in India’s tax policy-making. For occasion, in 2015, FIIs, by advantage of getting financial institution accounts in India, obtained notices for Minimum Alternative Tax (MAT), which led to an exodus of FIIs in August 2015. Constrained by the exodus (which any authorities ought to have fairly predicted), amendments have been made to exempt FIIs from MAT prospectively. As the useless confusion relating to applicability of MAT to FIIs previous to 2015-16 persevered, a committee was constituted to look into the problem. The committee reported the apparent – that MAT was relevant to firms integrated in India and thus, FIIs weren’t coated by it. The authorities in the end accepted the report and the suggestions, but it surely was too late as the entire saga left a bitter aftertaste within the mouths of overseas traders.
Similarly, the coverage flip-flops in tax exemptions to Special Economic Zones (SEZs) can be perceived as a debacle. In 2013, India in an surprising transfer, determined to revoke its promise of dividend distribution tax exemption and levied MAT, efficient 2012, on SEZs. The authorities said that tax advantages would finish in 2017 for SEZ builders, and in 2020 for SEZ models. This transfer was stunning for the reason that complete SEZ system was working properly and, in truth, wanted a push from the federal government to attain higher outcomes. Such acts have achieved little to encourage confidence in India’s already unpredictable political and authorized atmosphere.
Further, India’s response to worldwide awards has at all times been reactionary. The White Industries Award led India to revisit its Bilateral Investment Treaties (BITs) that in the end led to India terminating virtually all of its current BITs. The latest amendments made in November 2020, to the Arbitration and Conciliation Act, 1996, additionally seem like a step within the fallacious course. The amendments mandate a courtroom to grant unconditional keep on enforcement of an arbitral award if a prima facie case of fraud or corruption has been made out in both the making of (a) award; or (b) within the underlying settlement that kinds foundation of the arbitral award. The amendments are retrospective in nature, that’s they’ll apply to pending proceedings. Being retrospective in nature, the amendments do seem reactive to the Devas award in opposition to India, by which its allegation of fraud was rejected by the Permanent Court of Arbitration. The listening to on enforcement of the Devas award is more likely to start in Delhi High Court quickly and these retrospective amendments seem like a determined try by the federal government to undo the award. Such amendments increase fears of authorized uncertainty and should not mirror properly on India’s try to be a steady vacation spot for overseas traders.
The Way Forward
India has a authorities which has a picture of being business-friendly: regardless of the pandemic, India has been one of many largest recipients of overseas funding. FIIs are persevering with to pour cash into Indian markets and the financial system is doing higher than most predictions. This is the correct time to place an finish to the menace that was unleashed by earlier Congress-led United Progress Alliance authorities via retrospective taxation. The Modi authorities missed its earlier probabilities to repeal the amendments and withdraw the calls for, but it surely has one other alternative to place the whole matter to relaxation. While it has challenged the Vodafone award, it shouldn’t litigate the matter additional ought to the problem fail. Likewise, it ought to chorus from difficult the Cairn award and withdraw the enchantment within the Sanofi case. It is crucial that the federal government retains its phrase on tax incentives promised to SEZs and prolong the sundown clause past 2020. In this regard, the federal government ought to implement the Baba Kalyani Committee report in letter and spirit.
It can also be advisable to have the latest amendments to the Arbitration and Conciliation Act, 1996 apply prospectively. There is nothing worse than a authorities altering legal guidelines retrospectively to nullify antagonistic judgments/awards because it utterly defeats the aim of rule of legislation. Investors have a legit expectation that the authorized system will proceed to be constant and predictable. Such expectation is a part of the minimal commonplace of therapy that overseas investments deserve beneath customary worldwide legislation. The authorities should act pretty and, in a way, to make sure India has a steady and predictable authorized atmosphere.
India lastly has an investor-friendly picture after virtually a decade and will attempt to keep up that. It should legislate to institutionalize and supply long run commitments of tax advantages and incentives supplied to overseas and home traders beneath the Atmanirbhar Bharat Abhiyan. India has an opportunity to attain actual development led by manufacturing, inward overseas remittance and know-how, and availability of plentiful talent. It solely must be backed clear and constant policy-making. The COVID-19 pandemic has already given us many uncertainties with a number of variables, and Indian policy-making doesn’t must be unsure and unpredictable as properly.
Abhishek Dwivedi is an impartial advocate and arbitration counsel training in Lucknow and Mumbai, India.
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