Vodafone, Cairn cases: Why it is time for India to re-look at its retro tax

The uncertainty triggered by the retrospective taxation issues between British conglomerates and the Indian government has brought a sense of discomfort in the UK business community.

 |  3-minute read |   02-10-2020
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All investors, particularly overseas ones, expect the certainty of a stable tax regime. Overseas businesses tend not to anticipate that key rules of the game would be changed drastically after their investments have been made. From 2012 onwards, the policy of retrospective taxation has surely proven to be a dampener in the inflow of foreign capital from the UK and elsewhere into India.

UKIBC has been of the opinion that the uncertainty triggered by the retrospective taxation issues between British conglomerates Vodafone Plc and Cairn Energy and the Indian government has continued to bring in a sense of discomfort within the UK business community, and this needs to be resolved rapidly and amicably in order to boost investment sentiments and attract higher Foreign Direct Investment (FDI).

Prime Minister Narendra Modi had rightly stated in his first term that the controversial retrospective taxation is a thing of the past and this chapter ought never to be opened again in India. Former Finance Minister Arun Jaitley too had opined more than once that the stand on retrospective taxation taken by the UPA government was erroneous and that the BJP government will not be going down that path. 

Rather than viewing it as a loss of potential revenue amidst a rising fiscal deficit, by accepting the arbitration ruling in the Vodafone case made by the Permanent Court of Arbitration at The Hague in the Netherlands, the Government of India could leverage this opportunity to reorient its ‘inherited’ course on retrospective taxation. This would certainly send a positive signal to the investor community in the UK, as well as in the rest of the world.

Economic reforms in India amidst the challenging times of Covid-19 pandemic have already created a cautious optimism among investors. As India advances its dream to emerge as the manufacturing workshop of the world under the Aatmanirbhar Bharat and Make in India missions, it’s time to ensure that stability of tax policy becomes a central plank on which the edifice of economic self-reliance is built.

As a response to sentiments emanating from the recent developments, several developed countries are contemplating the relocation of part of their manufacturing supply chains to destinations other than China. Far beyond bilateral treaties, acceptance of the Vodafone arbitration ruling and amendments in the law related to retrospective taxation would surely propel India’s rightful claim as a worthwhile global manufacturing destination that is a viable and competitive alternative to China. 

Due to the adverse effect of the Covid-19 pandemic, as the global economy continues to suffer, including that of India, the retrospective tax verdict may actually turn out to be an opportunity for the country to relook its tax policies. Going forward, the stability of taxation and economic policies, in general, could be a key driver for increased inflow of FDI from the UK and the rest of the world to India in both the short to medium-term horizons.

Also Read: A toxic retro tax is dragging India's global image down

Writer

Jayant Krishna Jayant Krishna @jayantkrishnain

The writer is the first Indian CEO of UK India Business Council (UKIBC).

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