WHEN INDIA introduced a retroactive tax on the sale of shares in foreign companies with domestic assets in 2012, the measure was reviled by foreign businesses and decried by the Bharatiya Janata Party (BJP), then in opposition, as “tax terrorism”. So foreign investors had reason to cheer on August 5th, when the BJP government said it would repeal the law. The reversal illustrates the tug-of-war the country has long faced—between wanting to invite foreign investment into the country and resenting the legal tussles it brings.
The immediate reason for the repeal reflects the government’s desire to save itself from embarrassment overseas, rather than a dramatic conversion to an open approach to foreign investment. The tax law has led to legal headaches at home and abroad. Two big companies have successfully disputed their retrospective bills in international courts, but the government has not complied with the rulings, leading one of them to take some drastic steps.
In July Cairn Energy, a British oil and gas firm, obtained a French court order to freeze several Indian government properties in Paris, in pursuit of an arbitration award of $1.2bn plus interest and costs, made in The Hague last year. The relevant transactions date to a reorganisation of Cairn’s Indian assets made in 2006, and the sale of a majority stake to a mining firm in 2011. Cairnis also chasing Air India, the country’s state-owned flag-carrier, in American courts, in pursuit of its award.
The government also found itself wrong-footed in a long-running dispute with Vodafone, a mobile-phone company, which won an arbitration award in The Hague last year. The disputed transaction relates to its purchase in 2007 of Hutchison Essar, an Indian phone network (the row over which led India to introduce the retroactive-tax law in the first place). The repeal of the tax offers the government a way to end such legal tussles without facing the indignity of a company repossessing its assets around the world.
The change in law throws a light on the government’s strained relationship with foreign investors’ rights more broadly. A mistrust of international courts as a means of solving disputes over tax, over which the country asserts sovereign rights, has run through successive Indian governments.
In 2015 the country adopted a new template for its bilateral investment treaties that limited the rights of foreign investors to pursue international settlements, in the hope that existing agreements could be renegotiated along the same lines. But the renegotiations have not borne much fruit. According to the UN Conference on Trade and Development, India has signed 86 bilateral investment treaties since the mid-1990s; 74 have been terminated, almost all within the past five years. That includes the treaties with Britain and the Netherlands, under which Cairn and Vodafone, respectively, won their awards.
A lack of access to international dispute resolution leaves foreign investors at the mercy of a slow-moving domestic legal system, and may well have made them more reluctant to plough capital into the country. (One corporate lawsuit, for instance, has been pending since 1983.)
India’s approach might also hinder its trade policy. A reluctance to embrace dispute-resolution systems was not the main reason why it decided against signing Asia’s recent big trade pacts, the Comprehensive and Progressive Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership. But it will probably frustrate any attempt to join large blocs in future. Until India resolves the tension between its desire for investment and its desire for sovereignty, a law change might do little to entice foreign investors. ■
This article appeared in the Finance & economics section of the print edition under the headline “Bygones are bygones”