The exercise of sovereign power (like taxation) is limited only by what you can get away with. China steals the intellectual property rights of virtually every company that invests in that country, and most of the companies just grin and bear it; the Chinese market is too attractive to boycott it in protest. China also indulges in large-scale hacking of computer networks around the world, it forces content companies ranging from Google to Rupert Murdoch’s News Corp to play ball on censorship, and it has a beggar-thy-neighbour stance on currency policy.
Why? Because it can get away with it, just as western countries undertook gunboat diplomacy and forced opium on China in another age and got away with it, and in the current era launches unprovoked aggression on countries deemed to be out of favour (without, however, the success ratio that gunboat diplomacy achieved). Switzerland has prospered for decades on the back of money stolen from the poorest countries, and has got away with it too. So when western opinion is drummed up against India making retrospective changes to its tax laws, the operative question is not the supposedly moral one of right and wrong — and not just because many “respectable” countries make retrospective tax changes too. Rather, it is how India thinks it will get away with it.
The hard fact is that India needs foreign money, so it has to hang out a welcome sign and treat with respect what comes in. In the last few years, while imports have doubled, the country’s foreign exchange reserves have remained where they were, even as short-term debt has grown and the trade deficit ballooned to record levels. At the same time, the Indian economic story has begun to unravel a bit, so foreign investment is more skittish. Therefore, the problem with the Vodafone clause is not that the Budget perversely proposes a retrospective change in law that is specifically designed to overturn a Supreme Court judgment; after all, the moral argument is quite easily made that when an international company makes a handsome profit in the Indian market, it should pay some tax and not hide behind funny-money countries. There could even be a view that the Supreme Court was mistaken in its opinion, and that the Bombay High Court had got it right earlier. But these are no more than matters of academic debate. The problem with the Vodafone clause is not any of this, but quite simply that it ignores the country’s current position on the external account, and the need to sustain capital inflows. That is why the government should let the matter drop, and not pick a fight.
Our dual standards also need a re-look. The more developed countries – their governments and their companies – have no problem in playing by dual rules: straight ones for their citizens and home markets, and more dubious ones overseas (“When in Rome, do as Romans do”). India has the opposite approach: it deals with its own citizens in very dubious ways, but tries to play by the rules internationally! So the government has got used to making retrospective changes to tax laws, harassing taxpayers with absurd orders and extracting illegal pounds of flesh because citizens cannot drag it to international arbitration, as Vodafone has done. As the country has gained in economic heft, the government seems to have acquired the confidence to treat international business as badly as it treats domestic firms. If in doubt, ask Cairn and Qualcomm. Would it be too much to ask that, as India becomes a more “developed” economy, it adopt the best international standards for dealing with its own citizens, and not do it the other way round?