The Indian government has recently lost two big tax battles against Vodafone and Cairn Energy. However, it is not ready to accept the losses. Despite these two setbacks, India wants to retain its position on retrospective taxation.
Despite the Supreme Court putting an end to the controversy and holding that no tax was to be paid by Vodafone on the deal, the erstwhile government had brought an amendment to the Finance Act which gave power to the taxing authorities to retrospectively tax such deals. In other words, the government circumvented the judgment passed by the Supreme Court and as a result, the tax liability on Vodafone was restored.
The retrospective tax demand was globally criticized and even the present government criticized the erstwhile government for imposing retrospective taxation on the companies. Interestingly, the current government had promised a non-adversarial tax regime however, the $4.3 billion final assessment order for Cairn Energy came in the year 2016 i.e when the current government had been in control for two years.
Recently, Vodafone won the tax battle against the Indian government in a unanimous award passed by the Permanent Court of Arbitration. After Vodafone, Cairn Energy Plc won an award of $1.2 billion against the Indian government. The retrospective tax battle between the Indian government and these investors is far from over. India has already filed an appeal against the award passed by the Tribunal in Vodafone case and plans to do the same in Cairn Energy PLC.
Undoubtedly, this will send a negative message to prospective investors who were waiting to see whether the Indian government will stick to its promises and honour awards. India has failed to please huge global investors and appealing the decisions in Vodafone and Cairns will now take India away from its dream of becoming the most attractive destination for investments.
The Delhi High Court recently upheld the Emergency Award passed against the Future-Reliance deal. The single judge had earlier taken the prima facie view that an Emergency Arbitrator is an Arbitrator and the order passed by the Emergency Arbitrator in Singapore is enforceable as an order of the court under section 17(2) of the Arbitration and Conciliation Act, 1996. An appeal against this order is likely to eventually make its way to the Supreme Court.
The Arbitration Act was enacted to dissuade the parties taking advantage of the judiciary and delaying execution of contractual obligations. But these cases make it evident that a mockery is being made out of the process for speedier resolution.
India may have reached from Rank 142 in 2014 to 63 in 2020 in the World Bank’s Ease of Doing Business index, but the future does not look very bright. The Indian Bilateral Investment Treaty (BIT) Model 2016 has been severely criticised as India has moved away from an investor-friendly approach to a protective approach. Between 2016-2019, India terminated around 60 BITs, sending a negative message to investors. Since 2016, only 4 BITs have signed by India, none of which are in force yet.
The government has ignored the fact that the BITs have been a major reason for Foreign Direct Investment (FDI) in India as they provide commitment and protection to foreign investors. Therefore, the Indian approach to investment arbitration has been very regressive and must be revisited. It is often questioned why the Singapore International Arbitration Centre (SIAC) or the London Arbitration Centre are preferred over the Mumbai Centre for International Arbitration. This will happen only when parties follow the verdicts given by arbitration centres.
The Indian government has been trying to attract investment and has been claiming to provide a stable business environment to foreign investors. However, the actions of the government have shown a reverse trend. Investors are seeing India as an unstable and unpredictable market. India must understand that the idea is to encourage investments and to gain the confidence of investors by honouring arbitral awards. Cases such as Cairn and Vodafone were opportunities for the government to show the global investor community that India is the most attractive destination for investment.
When the government resists arbitral awards which are well reasoned, the investors are confused as to whether they should invest in India or not and whether India is an arbitration-friendly jurisdiction or not. Hence, to make India a hub of arbitration, the tradition of the government to challenge each and every award must be done away with. Another thing to keep in mind is that before taking any measures, the government and the relevant ministries must not forget their obligations under various BITs.
Also, before introducing any new law, the government must see how it can impact prospective investors. For instance, by unilaterally suspending the insolvency proceedings, the government ignored the interests of foreign investors as they were not able to recover their debts from wilful defaulters. Needless to say, a contracting state is duty bound to provide benefits to investors that existed during the time of making investment.
The efforts of the government and the judiciary cannot be ignored. However, we need to make improvements to the arbitration mechanism and make it more robust so as to attract more investments. The judiciary will also play a very important role in making India a hub of arbitration. Judgments like Vedanta pronounced by the Supreme Court will have far-reaching consequences as it gives a positive message and encourages foreign investments. A pro-enforcement approach is a must and it is to be kept in mind that one regressive judgment may take us ten years back and can discourage a lot of potential investors from investing in our country.
The author is a designated Principal Associate at Advani & Co.