August 14, 2021
W.In 2012, HEN INDIA introduced a retrospective tax on the sale of shares in foreign companies with domestic assets. The measure was abused by foreign companies and denounced as “tax terrorism” by the then opposition Bharatiya Janata Party (BJP). So foreign investors had reason to cheer on August 5th when the BJP government announced it would repeal the law. The reversal illustrates the tug-of-war that the country has been through for a long time – between the desire to invite foreign investment into the country and the rejection of the associated legal battles.
The immediate reason for the repeal reflects the government’s desire to save itself from embarrassment abroad, rather than a dramatic shift towards an open approach to foreign investment. Tax law has caused legal headaches at home and abroad. Two large companies successfully challenged their retrospective bills in international courts, but the government failed to comply, prompting one of them to take drastic action.
In July, Cairn Energy, a UK oil and gas company, secured a French court order to freeze several Indian government properties in Paris for a $ 1.2 billion arbitration award. The relevant transactions relate to a reorganization of Cairn’s Indian assets 2006 and the sale of a majority stake to a mining company in 2011. Cairnis is also prosecuting Air India, the country’s national airline, for its award in American courts.
The government was also on the wrong side in a long-standing dispute with the mobile operator Vodafone, which won an arbitration award in The Hague last year. The transaction at issue relates to the purchase of Hutchison Essar, an Indian telephone network, in 2007 (the dispute that led India to adopt the retrospective tax law). The tax waiver provides a way for the government to end such litigation without facing the humiliation of a company repossessing its assets around the world.
The change in the law sheds light on the government’s tense relationship with the rights of foreign investors in the broader sense. A distrust of international courts as a means of resolving tax disputes over which the country is asserting sovereign rights has drawn through several Indian governments.
In 2015, the country adopted a new bill for its bilateral investment treaties that restricted foreign investors’ rights to international settlement in the hope that existing agreements could be renegotiated in the same direction. But the renegotiations have not borne much fruit. According to the UN Trade and Development Conference, India has signed 86 bilateral investment treaties since the mid-1990s; 74 were terminated, almost all within the last five years. These include the contracts with Great Britain and the Netherlands, in which Cairn and Vodafone received their awards.
The lack of access to international dispute resolution leaves foreign investors at the mercy of a sluggish domestic legal system and may have made them reluctant to pump capital into the country. (For example, a company lawsuit has been pending since 1983.)
India’s approach could also hamper its trade policy. Reluctance towards dispute settlement systems was not the main reason why she chose not to sign the most recent major trade pacts in Asia, the Comprehensive and Progressive Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership. But it will likely ruin any attempt to join large blocs in the future. Until India resolves the tension between its desire to invest and its desire for sovereignty, a change in the law could do little to attract foreign investors. ■
This article appeared in the Finance & Economics section of the print edition under the heading “Past is Past”