Retrospective Taxation

#GS3 #Economy

 

Vodafone Group has claimed that it won an international arbitration case against the Indian government, ending one of the most high-profile disputes in the country involving a $2 billion tax claim.

 

The ruling 

  • An international arbitration tribunal in The Hague ruled that India’s imposition of a tax liability on Vodafone, as well as interest and penalties, were in a breach of an investment treaty agreement between India and the Netherlands.
  • India had claimed a total of ₹27,900 crore ($3.79 billion), including about $2 billion in tax, as well as interest and penalties.
  • The tribunal, in its ruling, said the government’s demand is in breach of “fair and equitable treatment” and it must cease seeking the dues from Vodafone. It also directed India to pay £4.3 million ($5.47 million) to the company as compensation for its legal costs.
  • One of the major factors for the Court of Arbitration to rule in favour of Vodafone was the violation of the BIT and the United Nations Commission on International Trade Law (UNCITRAL).
  • In 2014, when the Vodafone Group had initiated arbitration against India at the Court of Arbitration, it had done so under Article 9 of the BIT between India and the Netherlands.
  • Article 9 of the BIT says that any dispute between “an investor of one contracting party and the other contracting party in connection with an investment in the territory of the other contracting party” shall as far as possible be settled amicably through negotiations.
  • The other was Article 3 of the arbitration rules of UNCITRAL, which, among other things, says that “constitution of the arbitral tribunal shall not be hindered by any controversy with respect to the sufficiency of the notice of arbitration, which shall be finally resolved by the arbitral tribunal”.

 

Background 

  • Vodafone’s tax dispute stems from its $11 billion deal to buy the Indian mobile assets from Hutchison Whampoa in 2007. The government said Vodafone was liable to pay taxes on the acquisition, which the company contested.
  • In 2012, India’s top court ruled in favour of the telecom provider but the government changed the rules to enable it to tax deals that had already been concluded (retrospective taxation).
  • In 2014, Vodafone initiated arbitration proceedings against India.

 

What is ‘retrospective taxation’?

  • As the name suggests, retrospective taxation allows a country to pass a rule on taxing certain products, items or services and deals and charge companies from a time behind the date on which the law is passed.
  • Countries use this route to correct any anomalies in their taxation policies that have, in the past, allowed companies to take advantage of such loopholes. While governments often use a retrospective amendment to taxation laws to “clarify” existing laws, it ends up hurting companies that had knowingly or unknowingly interpreted the tax rules differently.
  • Apart from India, many countries including the US, the UK, the Netherlands, Canada, Belgium, Australia and Italy have retrospectively taxed companies, which had taken the benefit of loopholes in the previous law.
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