Vodafone's threat to launch arbitration proceedings against the Government, over its move to retrospectively bring under the tax net all offshore transactions involving underlying assets in India, is counterproductive. The London-based company has issued the notice through its Dutch subsidiary that had, in 2007, acquired Hutchison Essar's telecom business in India, by structuring it as a share transfer between overseas-incorporated entities. Vodafone has claimed that the Budget proposal to amend the Income Tax Act, to bring such a legislative change , violates the legal protection available to it under the India-Netherlands Bilateral Investment Treaty (BIT). The BIT's scope covers, principally, protection of investments by companies from the two countries in each other's territories and equality of treatment between local and foreign investments in this regard. For added effect, the treaty does not even discriminate between investments of Dutch companies and those of other countries in India. From both these perspectives, there is very little ground for Vodafone to complain of unfair treatment. There is nothing in the amendment either that singles out the Vodafone-Hutchison deal for special attention. Unless the retrospective amendment is proved specifically as discriminatory of Vodafone – contrary to the Government's position that it covers all transactions whose values derive, directly or indirectly, from transfer of capital assets in India – establishing any violation under the BIT may not be easy.
The main purpose of invoking provisions of the bilateral treaty, then, would seem to have been to ratchet up pressure on the Government to withdraw the planned amendment. Coming just after the British Chancellor of the Exchequer, George Osborne's raising the same matter during his recent India visit, Vodafone's latest action considerably limits the options before the Government. The Finance Bill is currently under the Parliament's consideration; any attempt now at dilution that would cause the tax demand on Vodafone to be dropped would only invite allegations of sell-off. That would amount to unnecessary politicisation of an issue best resolved through negotiations. The BIT itself provides for disputes being submitted to arbitration only after “normal, local, judicial” remedies are exhausted.
A more sensible approach on Vodafone's part, therefore, may have been to allow the amendments contained in the Finance Bill to be debated in Parliament and wait for the Revenue Department to raise afresh its $ 2.2 billion tax demand on the $ 11 billion transaction. This, it could have contested again in the Supreme Court, after having received a favourable verdict earlier. In asking the Government to “abandon” or “suitably amend” the retrospective tax proposals – even as Parliament is set to reconvene on April 24 – the company would be perceived as attempting to paint India as a ‘banana republic' that can be strong armed into submission. It is an effort that is bound to end in failure.