Every government in the world wants to market its countries readiness in helping the business to smoothly run its operations in their country. As per World Bank’s Ease of Doing Business Report, 2020, India stands at 63rd position with New Zealand leading the chart.

One of the prime reason for India’s current not up to the mark performance is Centre’s refusal to honour arbitration awards.

The central government is also the biggest litigator having the power to retrospectively amend laws even after Supreme Court decisions.

India’s entangled legal and tax infrastructure lacks clarity and is constantly changing, making it difficult for the business plan a long tern business plan as per the laws of the land.

Constantly changing rules with legal delays running into decades is another key reason why most global firms working in India have arbitration clauses in their agreements.

The Government of India came up with world class arbitration laws in India through recent amendments —it even put in place fairly strict rules to prevent the awards from being challenged—was to ensure that firms were able to settle their disputes quickly and enable ease of doing business. But quite the opposite is happening. Here are some of the examples of the same:

Vedanta and Videocon have just won a $476-mn arbitration award in the Supreme Court (SC) pertaining to the Ravva oil and gas fields that they had jointly developed in the 2000s against the GOI. The government and the private contractors had a dispute over how much of the costs could be recovered by the contractors and, after the dispute went into international arbitration in Malaysia, the private firms won. The case has been disputed by the GOI in the Indian courts.

Reliance Industries won an award in 2016 for the Panna Mukta Tapti fields it was working on. The government challenged it and the case is still in court. In the Reliance-ONGC case where the government had asked for $1.6-bn in damages—Reliance denied the charges that it had been ‘stealing’ natural gas from ONGC—the arbitration court gave a verdict in favour of Reliance; that was in 2018. The government has again challenged this award in court.

Antrix-Devas case, Isro’s arm Antrix was to build two satellites for Devas Multimedia, with 70 MHz of spectrum thrown in; However the CAG started enquiring into the matter, and the government cancelled the contract. Devas went in for arbitration and won a $672-mn award. The award is challenged by GOI in the courts.

In the Tata-DoCoMo case, when Docomo won the international arbitration award and Tata wanted to pay to meet its obligations, the GOI stepped in, argued that making the payment under the award would violate the Fema law, the judge said that if that were the case, the Tatas could pay the Fema penalties as well, but the award must be honoured.

Government’s attitude to not accept the arbitration awards is just one problem. Another one is, delays in the appointment of arbitrators in the case of Vodafone and Cairn. The next argument by GOI in the courts was that these cases could not be arbitrated under the bilateral investment treaties.

Earlier, GOI has also went ahead and brought in retrospective taxes when the arbitration orders went against them. The infamous case of Vodafone is a prime example.

Other than arbitration another reason why India suffers in Ease of Doing Business index is a fact that the GOI through the Income-tax dept. is the biggest litigant.

Till Feb 2020, direct tax revenue demands were raised, but not realised because of disputes, was around Rs 8 lakh crore. As per the official Law ministry’s Legal Information Management and Briefing System (LIMBS), in around 85% of the total pending direct tax cases before various ITATs, High Courts and the Supreme Court, the petitioner is income tax dept.

 In the Supreme Court alone, the tax dept. is the petitioner in more than 95% of direct tax appeals.

It is indeed worrying that out of 57.8 million individuals who submit income tax returns, 43.2 million doesn’t pay taxes. 

The fact is that in most of these appeals, CBDT may have lost at multiple appellate forums, be it CIT [A], ITATs or High Courts. But despite this, ITD continues to appeal all the way to the Supreme Court. At the Supreme court level there is little likelihood of reversing the consistent loss of the tax dept.  appeals at say the lower 3 levels.

This may be partly due to the fear of the Prevention of Corruption Act investigation or due to the stiff targets set for tax collections or increasing the tax base.

But why cannot litigation by Income tax dept. be reduced and simplified. GOI should focus on the measures to reduce litigation rather than just focusing on the faceless e-initiatives and other measures being rolled out.

This will free up the High Courts and Supreme Court who can then focus on the dispensation of day to day justice without the additional burden of appeals against cases lost by Income Tax Department in lower forums like CIT Appeals, ITAT etc...

This will help India shoot up through the ease of doing business and offer itself as a worthy alternative investment destination to China.

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