Retrospective taxation

Why in news?

• In a unanimous decision, the Permanent Court of Arbitration (PCA) at The Hague on Friday ruled that India’s retrospective demand of Rs 22,100 crore as capital gains and withholding tax from Vodafone for a 2007 deal was “in breach of the guarantee of fair and equitable treatment”.

What was the case?

• The tax demand was in relation to Vodafone acquisition of a 67% stake in the telecom company Hutchison for $11 billion.
• While Vodafone won the case in its favour in Supreme court, Finance Minister, the late Pranab Mukherjee, circumvented the Supreme Court’s ruling by proposing an amendment to the Finance Act, thereby giving the Income Tax Department the power to retrospectively tax such deals
• Vodafone Group then invoked a clause of the Bilateral Investment Treaty (BIT) signed between India and the Netherlands in 1995 and challenged the law in PCA.

What is retrospective taxation?

• As the name suggests, retrospective taxation allows a country to pass a rule on taxing certain products, items or services and deals and charge companies from a time behind the date on which the law is passed.
• Countries use this route to correct any anomalies in their taxation policies that have, in the past, allowed companies to take advantage of such loopholes.
• While governments often use a retrospective amendment to taxation laws to “clarify” existing laws, it ends up hurting companies that had knowingly or unknowingly interpreted the tax rules differently.
• Apart from India, many countries including the US, the UK, the Netherlands, Canada, Belgium, Australia and Italy have retrospectively taxed companies, which had taken the benefit of loopholes in the previous law.

What is the Bilateral Investment Treaty?

• A bilateral investment treaty (BIT) is an agreement establishing the terms and conditions for private investment by nationals and companies of one state in another state.
• On November 6, 1995, India and the Netherlands had signed a BIT for promotion and protection of investment by companies of each country in the other’s jurisdiction.
• Among the various agreements, the treaty had then stated that both countries would strive to “encourage and promote favourable conditions for investors” of the other country. The two countries would, under the BIT, ensure that companies present in each other’s jurisdictions would be “at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other”.
• While the treaty was between India and the Netherlands, Vodafone invoked it as its Dutch unit, Vodafone International Holdings BV, had bought the Indian business operations of Hutchinson Telecommunicaton International Ltd.
• This made it a transaction between a Dutch firm and an Indian firm.
• The BIT between India and the Netherlands expired on September 22, 2016.

Permanent Court of Arbitration (PCA)

• The Permanent Court of Arbitration (PCA) is an intergovernmental organization located in The Hague, Netherlands.
• It is not a court in the traditional sense, but provides services of arbitral tribunal to resolve disputes that arise out of international agreements between member states, international organizations or private parties.
• The cases span a range of legal issues involving territorial and maritime boundaries, sovereignty, human rights, international investment, and international and regional trade.
• The PCA is constituted through two separate multilateral conventions with a combined membership of 122 states.
• The organization is not a United Nations agency, but the PCA is an official United Nations Observer.

PRELIMS QUESTION

Consider the following statements regarding Permanent Court of Arbitration :
1.It is located in the Hague , Netherlands
2.It’s ambit is limited to cases related to international agreements between two state parties.
Which of the statements given above is/are correct?
(a)1 only
(b)2 only
(c)Both 1 and 2 
(d)Neither 1 nor 2

Answer to prelims question