Strong states are strengthened by putting limits on their own power; weak states are weakened by descending to arbitrariness. India has to choose what it wants to be.
That is the message that an international arbitration tribunal in The Hague is sending to New Delhi. The panel dismissed the Indian government’s $ 3 billion tax lawsuit against Vodafone Group Plc, finding that it violated fair treatment under the country’s bilateral investment protection pact with the Netherlands, and awarded the costs to the British company. telecommunications.
This ends a decade-long saga that tarnished India’s reputation among foreign investors. Rather than appeal the decision, Prime Minister Narendra Modi’s administration should accept defeat, honor the award, and move on. While much of the blame for this mess belongs to the previous coalition led by the Congress Party, Team Modi had six years to end the dispute. Ending “fiscal terror” was also his party’s promise in the 2014 elections that brought Modi to power.
If anything, the reckless expansion of state power, both in the economy and in society at large, has become the norm ever since. One hopes that this will become a time when Indian politicians of all shades come together to say, “Yes, we made a mistake. We should never have retroactively modified the tax law to go after Vodafone. It cost us more prestige than we could hope to win. ”
The dispute dates back to Vodafone’s 2007 purchase of Li Ka-shing’s wireless business in India. The Hong Kong mogul sold an investment firm based in the Cayman Islands to the UK trader. That company controlled, through other offshore entities, CK Hutchison Holdings Ltd.’s 67% stake in Hutchison Essar Ltd., the Indian unit. The tax collector wanted a share of CK’s large capital gains and asked Vodafone to settle the invoice with the amount it had withheld from Li’s check. But Vodafone’s lawyers had warned that no tax was applied. The dispute went to the Supreme Court of India, which held that the government’s tax jurisdiction did not extend to the Cayman Islands.
Then came the ugly part. The Indian government’s 2012 budget retrospectively amended the tax code, granting itself the power to pursue M&A deals from 1962 if the underlying asset was in India. Revenge was aimed at Vodafone, but it also caught Britain’s Cairn Energy Plc, which in 2006 had transferred ownership of its Rajasthan oil field, the country’s largest onshore discovery in two decades, to Cairn India Ltd., to prepare for the initial operation of the local drive. public offering.
What’s worse, the final $ 4.3 billion appraisal order for Cairn Energy came in February 2016. By that time, the Modi government had been in power for nearly two years, giving it plenty of time. to fulfill its promise of a tax regime without adversaries. After Cairn disputed the lien, New Delhi expropriated its shares in Vedanta Ltd. from Indian billionaire Anil Agarwal, into which Cairn had merged the India unit. The government pocketed the dividends and then sold the shares.
The application of the retrospective tax took an absurd turn when, around the Christmas holidays of 2016, a month after a draconian (and once again arbitrary) ban on 86% of the country’s banknotes, India began to instruct administrators of funds to withhold and pay taxes. when investors made a profit selling units in offshore vehicles that had half or more of their investment in Indian securities. Fortunately, this impractical plan was abandoned after it was pointed out that it would wipe out the India-centric fund industry.
Cairn shares closed nearly 13% higher in London on Friday. An arbitration award from the Edinburgh-based company is also expected soon. Investors have reason to be hopeful after it turned out that even India’s own candidate in the Vodafone court rejected New Delhi’s claim. However, for the Vodafone unit in India, the victory is Pyrrhic. He is now the victim of a different overreach: a life-threatening $ 7.8 billion lawsuit over past use of radio waves.
In a way, it’s a good thing that irregularities in the data have forced the World Bank to suspend its “Ease of Doing Business” survey, which saw India surpass 79 countries between 2014 and 2019. The reality on the ground may be very different . The Modi government did not invent the whimsical Indian state, but it has not lessened uncertainty or reduced bureaucracy. Neither for small startups nor for large global investors. Appealing the Vodafone award will only mean that once again you don’t learn your lesson.
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