Voda award issue discussed with PM Modi

NEW DELHI: The arbitration award to Vodafone by the Hague-based Permanent Court of Arbitration (PCA) in the long-standing tax dispute was recently discussed at the highest level of the government as the deadline to appeal against the verdict approaches.While there is a strong view within the administration that the award should be challenged at the Singapore-based appellate tribunal, no final decision has been taken yet, said people familiar with the development.The issue was discussed at a recent meeting where Prime Minister Narendra Modi was present. The government has time till December-end to appeal against the award and another meeting is likely to be held soon to finalise a response, said these people.A final call on the issue would be taken after examining all pros and cons, including the legal ramifications and impact on investment sentiment.Some experts are of the view that India should not appeal against the arbitration award as it would send a positive signal to foreign investors and close the vexed Vodafone retrospective tax issue that has dogged successive governments since 2012.But the dominant feeling within the government is that the award should be challenged as it questions India’s sovereign right to tax.Taxation a Sovereign RightThis award will also set a precedent for future taxation issues to be raised under the India-Netherlands bilateral investment promotion agreement and similar treaties. New Delhi’s position is that taxation is a sovereign right that cannot be challenged under bilateral investment treaties.Solicitor General Tushar Mehta has backed an appeal against the award.The government is also considering the implications of a soon to be announced verdict in another arbitration case involving Cairn Plc as it makes up its mind on the Vodafone matter. This case has been filed under the India-UK bilateral investment protection agreement and if Cairn wins the award, the tax authorities will have to return Rs 11,000 crore to the company.As India is bound to contest such a verdict on the grounds that bilateral investment treaties don’t encompass tax disputes, it would look strange if it took a different view in the Vodafone case, said people familiar with the matter. 79502318Retrospective DecisionsWhen the NDA government had assumed office in 2014, it had signalled its opposition to retrospective decisions on the tax front. In his first budget speech in July 2014, then finance minister Arun Jaitley had said while the government had the right to undertake retrospective legislation, it had to be exercised with extreme caution.At The Economic Times Global Business Summit in 2018, he had described the Vodafone retrospective tax decision as an erroneous one and said his government would not take up such matters.But policymakers say the current decision will revolve around the specific issue of whether tax disputes can be adjudicated under bilateral investment pacts and not on the larger issue of retrospective taxation.The Vodafone tax dispute has been festering since 2012 when finance minister Pranab Mukherjee amended income tax rules to nullify a Supreme Court ruling in favour of the telecom company. The ‘retrospective amendment’ made Vodafone liable to pay a total of Rs 20,000 crore, including penalties to the tax authorities. This liability, according to the tax department, arose because the $11.2 billion Vodafone-Hutchison Essar deal in 2007 was subject to capital gains tax, and Vodafone should have withheld tax.Subsequently, the UK company initiated arbitration proceedings and an international arbitration court on September 25 this year ruled that the Indian tax department was in breach of “guarantee of fair and equitable treatment” under the bilateral investment treaty. The company was entitled to protection under the accord, said the arbitration court.Govt Liability at Rs 85 croreThe Indian government’s total liability in the Vodafone case following the ruling stands at about Rs 85 crore. If it does not challenge the award and win its appeal in the tribunal, the income tax department may have to refund the Rs 45 crore already collected toward the tax levy and £4.3 million (about Rs 40 crore), which is 60% of the tribunal’s administrative costs.The government on November 17 had sought more time from the Delhi High Court in an ongoing tax case with Vodafone saying that a decision on appeal against the arbitration award will be taken by an empowered committee of the cabinet. The high court will now hear the matter on December 8.This case deals with the government’s appeal against a single judge bench order that had allowed Vodafone Group to initiate second arbitration proceedings under the India-UK Bilateral Investment Promotion and Protection Agreement.

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