One solution may be to allow international arbitration
Given how the government is anxious to project a pro-poor image, its biggest challenge will be in dealing with the retrospective tax law as well as its aftermath. Which is why, despite assuring investors that he would deal with the retrospective tax law, even UPA finance minister P Chidambaram was not able to repeal the law, indeed to even conciliate with Vodafone when it wanted another tax case—also under a retrospective law—to be clubbed with the original one. While Nokia joined a long list of companies who have filed for arbitration a few weeks ago, as FE reported on Monday, the Japanese government has also written asking for removal of $3 billion worth of retrospective taxation on Japanese companies such as Mitsubishi which is facing a $2 billion tax demand. Though the Japanese have not threatened arbitration, the government has said the taxation violates the India-Japan tax treaty. If Japan is going to be one of prime minister Narendra Modi’s first ports of call, chances are he is going to want to take a solution with him—Japanese prime minister Shinzo Abe had raised this with the then prime minister Manmohan Singh but to no avail—more so given how Japan is likely to be a big investor in Indian infrastructure.
If the BJP is willing to take on its detractors who will pounce on it as being pro-rich the moment any legislation in brought in Parliament—India Inc is hoping this will be as soon as the budget session—there are obvious solutions. One is to set up a panel under either a well-known tax expert, or perhaps a retired Supreme Court judge, and get this to look at the rights and wrongs of each case, and then take a call based on this. Another is to refer the matter to the Supreme Court with a larger bench—larger than the one that heard the original Vodafone case which rejected the taxman’s arguments—and to request the Chief Justice of India for an early conclusion of the case.
A safer solution is allow the cases to go to international arbitration. So far, in most of the cases that have come up before the government, whether Vodafone or Nokia, the government’s first response has been to deny that the case can be taken up for arbitration under various bilateral investment treaties with different countries. In various other cases, such as the one with Reliance Industries Limited, the government has dragged its feet to ensure it took 29 months to even allow the arbitrators to be appointed. If the government, however, is to accept the Vodafone and Nokia notices and allow the case to be heard internationally, this would not only pacify investors, it would give the government the necessary room to take action. If the case went against the government, this can be used as a precedent to settle other cases as well.