By Sujit Bhar
The legal ramifications of the repeal of the obtuse retrospective tax law of India have been dissected and the viscera is out in the open for all to observe. However, the corporate benefits of such a repeal portends good, for once, for the general economy and should generate growth and competition all over again. The Vodafone-Idea situation is a glowing example of this, as well as that of Cairn Energy.
At the time of writing this column, Cairn Energy stocks were trading 26 percent higher on the London Stock Exchange, though Vodafone Group stocks (also UK based) remained a laggard at a mere 0.5 percent positive lift.
The law in itself was unintelligent, considering that the entire world had shed its socialist tag a long time back and several courts and arbitration panels across the world had completely rejected India’s absurd claims and arguments, awarding judgments to all who cared to contest. The victories had embarrassed India on the world stage and the repeal just had to be undergone.
There have been stupid rulings, with government nods earlier. Even while the destructive communists—the CPI(M), to be precise—were ruling West Bengal quite some time back, the virtually monopolist electricity provider in Kolkata, the Calcutta Electric Supply Corporation (CESC), had been allowed by the government to collect monies—calling it arrears—from the public, through the issue of “supplementary bills”. It was promoted by the company and assumed by the government that in the past the company had billed the public less than it should have and it needs the money now. An absurd claim by any logic, but the government gave the CESC the go ahead anyway and collected a large amount of tax from that bounty. It was inhuman and illegal, not that the CPI(M), with its anti-public policies, cared.
This retro tax law represented the other side of the coin, where the corporate body was the evil doer and the then government, a holier than thou apparition in socialist garb, was supposed to punish the devil for past “sins”. The current dispensation at the centre deserves kudos for rejecting the law.
Things had come to such a pass at Vodafone Idea Ltd that Kumar Mangalam Birla, the head of the Aditya Birla Group empire that owns Idea, had publicly offered its stake to the government to run the company as it pleases, at least not shut it down and generate massive unemployment in this pandemic-stricken economy. It was becoming impossible for the Birlas, and Idea, to pay the massive “dues” generated through this law’s provisions.
That public stance of one of India’s most celebrated billionaires, as well as the complete embarrassment of the country on the world stage, forced the government to move the repeal process through Parliament at breakneck pace. Fingers were being pointed at the almost indomitable status that Mukesh Ambani’s Jio was reaching, completely sans competition, and this did not present a good, pro-business image of the government internationally.
The biggest scare that this retrospective tax regime had generated was among foreign investors. Business in India will not survive if foreign investors decide to stay away and also pull out from existing positions. It is not just the inert bureaucracy that prevents a business from taking root, leave alone growing. India’s obscure and pathetically biased laws lend an eager hand in actually scaring away investors and in killing the natural entrepreneurial spirit that Indians have.
What this repeal shows, in actual practice, is the good intent that this government has to remove hurdles and simplify processes. However, complicating is easier by muddled minds in the bureaucracy than simplifying it. It will take a strong will and an iron hand of the government to make the inert babus understand that the bigger goal is growth.
That will bring us right back to the exchequer. The immense “dues” that the major conglomerates had “shown” and were being beaten down with so far, were receivables in the books of the exchequer and its bankers. With the repeal of this law, the exchequer will be left with no option of pushing through “recovery” processes. Wiping such level of “assets” from its books could leave a gaping hole that will require a proactive government to patch up. Hence, it will not be enough for the government to just repeal the law and then sit on its hunches. It will have to take proactive steps in refinancing the banks. The fairytale will have to be retold, with modifications.
To understand this, one has to go back to 2007, when India’s main telecom operator was Hutch, a Singapore-based company. Vodafone, eyeing one of the biggest markets in the world, India, bought over a majority stake in the telecom operations of the operator for $11.1 billion. What happened was that the India operations changed hands, but all deals were concluded outside India, including financial transactions. In India babus raised their eyebrows at the “evil” company wanting to enter India, without once thinking that it is actually the beginning of something big for the Indian economy. Small and conceited minds in the bureaucracy ruled that Vodafone will have to pay capital gains tax, because there had been transfer of Indian assets involved, with no Indian gain.
The case went to the Supreme Court, which promptly threw out the babus’ cheap claims, citing that there was no law in India that supported such stupid claims. Hence Vodafone had no tax liability. That happened in 2012.
However, the then finance minister, Pranab Mukherjee, was his usual argumentative (and non-productive) Bengali self, and he manoeuvred the UPA government to get Parliament to amend the Finance Act that enabled the imposition of this absurd tax. How absurd and stupid was this amendment can be gauged from the fact that, this now enabled the government to claim tax, retrospectively for deals from as far back as 1962. The complication in the amendment was such that it had the legal power to lick benefits off from old, withered shares of foreign entities which had transferred assets in India. Whether it actually could, or not, is another matter.
While the idea was to “catch” Vodafone legally, in the bag of immense greed also landed Cairn Energy. A completely hot-wired mindset of a finance minister whose financial foresight was as limited as his political wisdom was vast, resulted in re-imposition of a Rs 7,990 crore tax bill on Vodafone. The logic was that Vodafone should have deducted that amount of tax at source before paying Hutchison. What an idea, Sir’ji! Mukherjee, in his wisdom, wanted the international telecom operator to believe that an amendment to the finance bill was on the way and hence it should have made a deduction at source, while the ground reality was that there was simply no law. So, by 2016, with interest and penalty (for not being prescient) Vodafone supposedly owed the greedy government of India Rs 22,100 crore.
Why was Cairn placed in the “dock”? According to that law (amendment) Cairn “owed” the Indian taxman Rs 10,247 crore (due from way back in 2006) for bringing its Indian assets under a holding company called Cairn India Ltd. How did Cairn do that? Through a simple, internationally accepted procedure: transferring shares to Cairn India Ltd. India seethed at this lost opportunity to squeeze yet another corporate entity of juice and said no tax was paid on this process, so the company was at fault.
However, in this case, no financial transaction had taken place, so there was no tax invoice to raise. The crooked financial brains in the government waited, till, a few years later, Cairn India Ltd went into its IPO, divesting 30 per cent of shares. Mining giant Vedanta quickly picked up most of the shares, but there it got stuck, because the greedy babus in the finance department did not allow Cairn UK to transfer its 9.8 percent stake in Cairn India to Vedanta. The Indian knee was on Cairn’s throat, suffocating it, ordering that the company must clear the tax “liability”. There was money to be squeezed out now, so the finance department’s eyes glowed in greed. The Indian taxmen said Cairn has to pay Rs 10,247 crore in back taxes, plus, of course, the penalties and interest. That was in 2014.
The small minds in India had presupposed a cave-in from Cairn. Instead, Cairn moved the Permanent Court of Arbitration at The Hague, Netherlands, and argued that India had violated the terms of the India-UK Bilateral Investment Treaty. The treaty provides protection against arbitrary decisions by laying down that India would treat investment from UK in a “fair and equitable” manner. Vodafone, too, took that route, especially because its Dutch arm was involved in the Hutch deal.
The cases took a while, and in September last year the Hague court, expectedly, quashed India’s tax claim and ruled for Vodafone. Interestingly, in this arbitration verdict, even the Indian representative voted against India. Later, in December last year, Cairn, too got a favourable verdict, with India’s ridiculous claim thrown out again. That was not the end. Cairn was awarded $1.4 billion in damages.
With the law still in place, India had to refuse to pay up, or risk going against an established law of the land. What followed was utterly embarrassing for the country. Cairn was allowed to go into recovery proceedings and this ruling was for all Indian establishments across the globe. That allowed a French court to freeze some buildings, meant for Indian diplomats, in Paris, and set them up for auction. It was shameful.
The Taxation Laws (Amendment) Bill, 2021, introduced by the Union Finance Ministry was the only way out. It has been done.
True, that in the end the repeal of the law will allow Anil Agarwal’s Vedanta to take complete control of Cairn, and it is true that Agarwal is close to the powers that be in Delhi now. However, one has to admit that such adjustments will remain minor in view of the huge gains that this legal action of the government is expected to bring in. It is expected that FIIs will be back with a bang, Vodafone’s parent company could again infuse more cash into V-i operations and there could be more major corporations could start breathing easily.
Also, with the return of big bucks industry the crippled MSME sector of the country could slowly return to health. These are long projections, but probable scenarios. All for the discarding of a bad law.