Time to move on

Govt should end its retrospective tax disputes

The Union finance ministry and UK-based oil major Cairn Energy have had two rounds of high-level discussions on the resolution of the retrospective tax dispute, which has dragged for almost a decade. In December last year, a tribunal ruled the government’s demand violated the UK-India bilateral investment treaty, and recently Cairn Energy has begun the legal process in the US to implement that tribunal’s decision. The government here is at risk of having some of its assets abroad impounded to pay Cairn Energy the $1.2 billion it owes. However, it appears in no mood to relent — some reports have said it has offered Cairn Energy the option of getting only half the money it is owed sans interest and penalties. It is also reportedly considering appealing the tribunal’s verdict, as well as asking the Supreme Court to declare that the investment treaty has no bearing on tax demands. This looks less like a government in command of the argument and more like bureaucrats flailing about and trying everything in sight. 

The only reasonable action for the government is to move on from the retrospective tax demands altogether. Late last year it also lost its arbitration against Vodafone, this time on whether the retrospective tax demand violated the bilateral investment treaty with the Netherlands. It has appealed the Vodafone decision, as it apparently intends to do with the Cairn decision. But this would be a mistake. Whether against Vodafone or Cairn, the cost in terms of time and a vitiated investment climate for the country is far greater than any gains to the exchequer. Given that the government has already repeatedly said that it does not believe in retrospective tax demands the way its predecessors did, its simultaneous claims to  enforcing the sovereign right to tax will only create confusion and affect the investment climate.

It is worth noting that Cairn’s operations in India were not those of some fly-by-night operator. During its time in the country, it was responsible for one of the largest energy resource discoveries in recent Indian history. Tax issues have adversely impacted Cairn’s perception of India as an investment destination the same way that they have likely put paid to hopes of any further investment in the Indian telecom infrastructure from Vodafone. For a country starved of private investment in infrastructure, this is self-defeating policymaking.

The government has rightly privileged the ease of doing business and tax administration reform. These arbitration rulings should be seen as a legacy of a past that the pro-business reforms of recent years have sought to leave behind. In order to be consistent with the reformist orientation of the government, as elegantly summarised by the prime minister in Parliament recently, it should no longer throw good money after bad. It is time to stop chasing companies that invested in India in such a manner that they regret their decision. Retrospective tax demands may be a country’s sovereign right, but there is no question that they destroy policy stability and cause fears to build up among investors. Chasing such demands through forum- and tribunal-shopping as the government is currently doing makes all talk of the ease of doing business sound hollow.