Why India continues to fight the Retrospective Tax Awards

One of India’s many fiscal challenges this budget season relates almost entirely to how the law is read on retrospective taxation. What hangs in the balance is over INR 50,000 crore or more that may be owed to the exchequer by Cairn Energy Plc and Vodafone BV — both international disputes having resulted in recent arbitral awards that have ruled against India on the issue (the ​“Retrospective Tax Awards”). There is much, however, that belies these long-standing legal contests. Consider the Vodafone dispute, which began in 2007 when the Indian tax department issued a notice to Vodafone BV for capital gains tax for its acquisition of Hutch’s India business in 2007. Vodafone claimed that the transaction, wrapped in a transfer of shares from one offshore holding company to another, was beyond India’s taxing authority. In 2010, the Bombay High Court reasoned that the statutory phrase ​“all income accruing or arising, whether directly or indirectly…through the transfer of a capital asset situate in India” would mean that such ​“composite” transactions would be taxable to the extent they derived value from assets in India. In 2012, the Supreme Court reversed that interpretation vigorously.