Topics Covered: Important International institutions, agencies and fora, their structure, mandate.
Retrospective taxation: the Vodafone case, and the Hague court ruling:
Context:
In a unanimous decision, the Permanent Court of Arbitration at The Hague has ruled that:
- India’s retrospective demand of Rs 22,100 crore as capital gains and withholding tax imposed on Vodafone for a 2007 deal was “in breach of the guarantee of fair and equitable treatment”.
- India should not to pursue the tax demand any more against Vodafone Group.
What is the case?
- In May 2007, Vodafone bought a 67% stake in Hutchison Whampoa for $11 billion.
- In September that year, Indian government raised a demand of Rs 7,990 crore in capital gains and withholding tax from Vodafone, saying the company should have deducted the tax at source before making a payment to Hutchison.
- Vodafone challenged the demand notice in the Bombay High Court, which ruled in favour of the Income Tax Department.
- Then, Vodafone challenged the judgment in the Supreme Court, which in 2012 ruled that Vodafone Group’s interpretation of the Income Tax Act of 1961 was correct and that it did not have to pay any taxes for the stake purchase.
- But, the same year, the then Finance Minister, the late Pranab Mukherjee, circumvented the Supreme Court’s ruling by proposing an amendment to the Finance Act, thereby giving the Income Tax Department the power to retrospectively tax such deals.
The case had by then become infamous as the ‘retrospective taxation case’.
What happened after India passed the retrospective taxation law?
The Act was passed by Parliament in 2012 and the onus to pay the taxes fell back on Vodafone.
- Later, Vodafone Group invoked Clause 9 of the Bilateral Investment Treaty (BIT) signed between India and the Netherlands in 1995.
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.
What is the Bilateral Investment Treaty?
The BIT was signed for promotion and protection of investment by companies of each country in the other’s jurisdiction.
- The two countries would, under the BIT, ensure that companies present in each other’s jurisdictions would be “at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other”.
What did the Permanent Court of Arbitration at The Hague say?
- It ruled in favour of Vodafone. Because, the taxation was in violation of the BIT and the United Nations Commission on International Trade Law (UNCITRAL).
- The tribunal also said that now since it had been established that India had breached the terms of the agreement, it must now stop efforts to recover the said taxes from Vodafone.
- It also directed India to pay £4.3 million ($5.47 million) to the company as compensation for its legal costs.
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.
InstaLinks:
Prelims Link:
- PCA- composition, functions and members.
- Are PCA rulings binding on parties.
- Clause 9 of the Bilateral Investment Treaty (BIT) signed between India and the Netherlands in 1995.
- What is retrospective taxation?
- Overview of UNCITRAL.
Mains Link:
Discuss the functions and significance of PCA.
Sources: the Hindu and Indian Express.
