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Retrospective tax amendment needs to be buried for India’s long-term benefit

Pranab Mukherjee’s decision as finance minister in 2012 to retrospectively amend a section of the Income-tax Act was perhaps the most economically damaging decision of UPA-2. Its reverberations continue as NDA clings on to the underlying approach. The most recent fallout of the 2012 amendment showed up last week when UK’s Cairn Energy filed a lawsuit in New York, seeking to enforce an international arbitral tribunal’s award against India. Target is Air India, described in the suit as the “alter ego” of the country. Aim is to seize the airline’s assets.

The retrospective amendment was introduced in the 2012 Budget to nullify a Supreme Court verdict that went in favour of Vodafone International in its income tax dispute with the government. This tax amendment set off a chain reaction. It potentially opened up cases that were done and dusted. One case that was exhumed was a transaction that Cairn Energy had undertaken in 2006. In Cairn’s case, the income tax department even sold its financial assets to realise the tax demand. Both Vodafone and Cairn filed arbitrations abroad claiming the government’s actions violated its bilateral investment treaties with the Netherlands and UK respectively. India lost both cases.

At a legal level, it may be seen as a dispute between India’s sovereign right over tax law and its sovereign commitment to honour international treaties. In both arbitral awards, the commitment to treaties was given precedence. The government disagrees and has challenged the Vodafone award. But this approach is counterproductive. It will have an adverse impact on potential foreign direct investment as it vitiates the investment atmosphere. It also affects Air India’s disinvestment exercise. For India’s long-term economic benefit, the 2012 retrospective amendment needs to be buried. Reputations matter in investment decisions.



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This piece appeared as an editorial opinion in the print edition of The Times of India.



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