Ending the government’s high-handedness towards investors has to top the new government’s agenda
Going by the number of abusive tweets, it is apparent the country’s citizenry—or at least the twitterati—is convinced the Ambani brothers are ripping off the country. One is hoarding gas and the other withholding payments to the public sector NTPC while he continues to over-charge electricity customers in the capital.
This newspaper has spent far too much time, and valuable newsprint, explaining why gas prices needed to be raised—in this year itself, it will result in $4 billion more investment from Reliance alone. But even if you assume the senior Ambani has hoarded gas in the manner most believe he has, it has to be galling that it has taken him—so much for his ‘owning’ the Congress party!—29 months, and lots of legal fees and Supreme Court time, to finally get the government to agree to the panel of arbitrators who will decide on whether or not he has hoarded gas.
If two people have a disagreement on something—in this case, over several billion dollars worth of capital spending and/or gas supplies—you would think they would be in a hurry to settle it, but not quite. The government simply dug in its heels, first over not wanting to arbitrate, then over appointing an arbitrator—in each instance, Reliance paid Harish Salve good money to argue before the Supreme Court to get the government to move.
In the case of Vodafone, when the finance minister said the government would defend the telecom major’s arbitration notice, what he really meant was that the government would keep arguing that the tax dispute was not something that qualified under the Indo-Netherlands Bilateral Investment Treaty.
Imagine the irony: You slap a tax case on Vodafone which, under the then law, is not applicable; when you lose the case in the highest court of the land, you change the law; and then impose a penalty and a penal interest rate because the company evaded a tax under a law that did not exist when the supposed evasion is supposed to have taken place. And when the company wants to go in for neutral arbitration, you refuse to even start the process.
Even that, it has to be admitted, is the kind of simplification that journalists are typically guilty of. Had the government agreed to go in for overseas arbitration of the type Vodafone wanted, and had it lost the case, there is no certainty that it would have implemented the arbitral award. An Australian mining firm White Industries had a dispute with Coal India Limited, filed for arbitration and won the case in May 2002; Coal India got this set aside by the Calcutta High Court—the case is still pending in the Supreme Court. Meanwhile, White applied for justice under the India-Australia Bilateral Investment Treaty (BIT)—it argued the delay in enforcing an arbitral award violated the ‘effective means’ standard incorporated in the BIT, and won the case in 2011 though the government argued the case did not come under the jurisdiction of the BIT.
The government’s high-handedness, sadly, is not restricted to such cases. In the 3G intra-circle roaming case that the government has just lost in the telecom appellate tribunal—the case which outgoing telecom minister Kapil Sibal has said he hopes the next government will appeal—the government went back on its written word. When the then telecom secretary was asked about this by FE in 2011, his exact words were, “it is clear that we will go by what (we said) and we are trying to understand what (we have) said on this”! What the telecom tribunal thought of the statement is clear from its statement that the ministry’s stance was “misleading” and “seriously flawed” and that “the government of India cannot be seen playing games in a matter of national importance”.
There are lots of cases where foreign investors are up in arms—between FY09 and FY14, R2,17,300 crore of transfer pricing orders have been given, for the period till FY10—but the most egregious, after Vodafone, has to be the one involving Microsoft. In this case, the taxman’s orders (goo.gl/tGDmG8) were hilarious. Half of Microsoft’s global profits come from its R&D operations, and since 4.3% of its R&D workforce is in India, add back 4.3% of Microsoft’s global profits—the ones that accrue from the R&D operations—to the Indian arm.
Put the question to union finance minister P Chidambaram, as FE did, and he will tell you that it is wrong to single out India as much of the developed world is up in arms against companies that are finding ingenious ways to avoid paying taxes. And he’s right, with one big difference. While trying to find ways to get companies to pay taxes, the US taxman is not slapping tax case after tax case and then, when the company wants, refusing to even go in for arbitration.
Fixing this has to be the next government’s top priority—not just the tax cases, but getting babus to stop acting as if they are doing businessmen a favour by allowing them to do business. Agreeing to hike gas prices, for instance, is not doing anyone a favour—it is something that the government is contractually bound to do under the production sharing contract. Not challenging the TDSAT verdict is not going to be a favour—though many will portray it as one—since roaming is part of the contract telcos have signed with the government. Deciding whether the junior Ambani’s firms will get back the R21,764 crore Delhi’s citizens owe them over a period of 3 years or 8 years, similarly, is not a favour.
And for those who object to the recommendation that the government set up a special tribunal, or make it a part of the current taxation system, to examine the rash of tax rulings against MNCs over the past couple of years, it’s useful to get some perspective. We’re talking of R2,17,300 crore of tax demands being examined by a neutral panel of experts in a transparent manner—contrast this with R5,33,583 crore and R5,73,627 crore of tax giveways in FY12 and FY13, respectively, decisions taken in an opaque manner by faceless bureaucrats and politicians hiding behind them pulling all manner of strings.
Postscript: There are obviously many ‘top of agenda’ items for the new government, why should doling out breaks for fat cat industrialists be the very first? Surely more decentralisation of powers or cutting subsidies or reforming labour laws deserve that honour? That may indeed be true, but for any government, it is advisable to tackle the low-hanging fruit first. In the case of gas prices, RIL alone has said that, were prices to be raised, it will invest $4 billion by March and another $4-6 billion over the next couple of years. In the case of telecom, were 3G roaming to be left alone and reasonable spectrum trading rules to be put in place, several billion dollars of investment will flow immediately—why else did telcos spendR61,000 crore ($10 billion) in the auctions in February 2014?