In the income tax department under the Union finance ministry, arrogance mixed with intellectual inertia is discernible in abundance. The destructive power that the department enjoys is on full display in the Vodafone and Cairn Energy cases in which highly reputed international tribunals have held against the Government of India for acts of omission and commission of runaway IT officials.
Back in 2006, a Hong Kong-based company Hutchison Telecommunications International Technologies (HTIT) sold a Cayman Islands company CGP Investment Holdings to the Netherlands-based Vodafone International Holdings BV (VIH). CGP owned a 67 percent shareholding in Hutchison Essar (India). The IT department issued a tax notice for Rs.11,218 crore on VIH stating that since HTIT had earned a capital gain on sale of a company sited in India, VIH should have deducted tax at source. Yes the issue is complex. But the moot point is that our own Supreme Court held that the IT department’s claim for Rs.22,000 crore (after adding interest and penalties) was unjustified.
Enter Pranab Mukherjee, then Union finance minister in the Congress-led UPA government. To be one up on Prime Minister Manmohan Singh, Mukherjee pushed a resolution through Parliament overruling the Supreme Court verdict, taxing VIH with retrospective effect.
The Permanent Court of Arbitration in the Hague held that the retrospective tax demand from VIH was in violation of a bilateral investment treaty (1995) between India and the Netherlands. Similarly, following an offshore reorganisation of its India business by Cairn Energy plc (UK), the IT department levied a $1.4 billion (Rs.10,234 crore) capital gains tax demand on Cairn Energy and seized its assets in India of equivalent value. This demand was also overturned by the Singapore International Tribunal (1991) as being violative of a UK-India investment treaty.
Meanwhile, the Central government, is moving heaven and earth to attract foreign investment into India in the wake of capital flight out of China. Clearly, it isn’t aware of the damage the runaway IT department is doing to India’s image as a trustworthy destination for foreign investors.