Govt yet to take a call on challenging Vodafone tax arbitration award

The government is yet to take a call on appealing against an arbitration award relating to retrospective tax demand against British telecom player Vodafone.

Last month, an international arbitration court ruled that the Indian government seeking Rs 22,100 crore in taxes from telecom giant Vodafone using retrospective legislation was in "breach of the guarantee of fair and equitable treatment" guaranteed under the bilateral investment protection pact between India and the Netherlands.

According to sources, the government has not taken a call on challenging the award yet.

While the cost implication in the case is limited to having to pay Rs 85 crore to Vodafone in legal cost, what is weighing on the government mind is a separate arbitration involving UK's Cairn Energy plc.

If a separate arbitration panel were to hold a demand for Rs 10,247 crore in taxes using the same retrospective legislation as illegal, the government will have to pay Cairn as much as $1.5 billion (Rs 11,000 crore).

This is the amount equivalent to the value of shares of Cairn that the government had sold to recover a part of the tax demand. It also includes the dividends and tax refund seized.

Speaking on other issues, the sources said the cost of waiving compound interest for loans up to Rs 2 crore during the moratorium period will be around Rs 6,500 crore.

This comes even as the Centre has told the Supreme Court that the burden of interest on interest will be borne by the government, not the banks.

Meanwhile, the Supreme Court on Tuesday said it would hear a batch of petitions tomorrow, which have raised issues concerning the six-month loan moratorium period announced due to the Covid-19 pandemic.

The pleas came up for hearing before a bench, comprising Justices Ashok Bhushan, R S Reddy and M R Shah, which said it would hear the matter on Wednesday.

Earlier this month, the Centre had filed an affidavit saying that going any further than the fiscal policy decisions already taken, such as waiver of compound interest charged on loans of up to Rs 2 crore for six months moratorium period, maybe "detrimental" to the overall economic scenario, the national economy and banks may not take "inevitable financial constraints".

On rising food inflation, the sources said the government is there and a set of ministers monitors this regularly.

Inflation is something that this government is sensitive to, they added.

Retail inflation rose to an eight-month high of 7.34 per cent in September over rising prices of essential kitchen items, government data showed on Monday, making the Reserve Bank of India's task to push growth by reducing the interest rate even more difficult in the coming days.

In August, the retail inflation, which is measured by the consumer price index (CPI), grew 6.69 per cent.

Asked if there is fiscal space for further stimulus, the sources said, the option is not closed for providing further relief measures if the need arises.

Finance Minister Nirmala Sitharaman on Monday announced a Rs 73,000 crore package, including advance payment of a part of wages to central government employees and cash in lieu of LTC, to stimulate consumer demand and investment in the economy damaged by the coronavirus pandemic.

As much as Rs 11,575 crore would be paid as LTC allowance and advance to central government and PSU employees on the condition that they spend on non-essential goods before March 31, she has said.

States would separately be eligible to get Rs 12,000 crore in 50-year interest-free loans for capital expenditure, while the Union government will spend an additional Rs 2,500 crore toward capital expenditure on roads, defence infrastructure, water supply and urban development.

The sources also said that a proposal for an infrastructure financing company is expected to reach the Union Cabinet soon.

Work on the proposal for a development finance institute is going on and it is at an advanced stage, they added.

Asked about the bad bank, they said there has been no progress on the proposal.