It is often said, “it’s not how we make mistakes, but how we correct them that defines us.”
In a span of a month, the Central government has taken two bold steps, made course corrections and administered a twin boost to the economy. The first is related to scrapping and rolling back the controversial 2012 retrospective tax that had landed the country in an ugly legal spat with the UK’s telecom giant Vodafone and the oil major Cairn. The second concerned a package of reforms designed to inject fresh life into the ailing telecom sector gasping for breath.
Let us look briefly at both.
Retrospective Taxation Was a Sore Legacy
On the retrospective tax, inherited by the present government as a sore legacy, the Centre decided to bite the bullet last month. An Act was passed by Parliament in August 2021 scrapping a controversial 2012 law that retrospectively levied capital gains tax on companies for the indirect transfer of their Indian assets. Termed as “perhaps the boldest move taken in the history of Indian tax laws” in a BBC report, it opened a new era of trust for investors by nullifying tax demands on companies of billions of dollars, subject to the condition that they withdrew litigation against the government and undertook not to claim interest or damages. The legislation also proposed to refund any principal tax amount they might have paid. At least 17 companies, including British oil and gas major Cairn Energy, and the telecom giant Vodafone, stood to benefit.
To give some background, Vodafone had acquired Hutch in 2007 with a $11-billion deal through an overseas holding company (a subsidiary of Vodafone bought Hutchison’s entire stake in CGP investments, which owned 67% of the telecom operator Hutch Essar). The Indian government sent a notice to the UK telecom company that it should have withheld tax on the above transaction, claimed ₹11,218 crore, and later added ₹7,900 crore in penalties. Vodafone challenged the notice in the Supreme Court and got a verdict in its favour. The government, however, in 2012, amended the tax law retrospectively as a sovereign right and provided a legal framework to its claim.
The Cairn Fiasco
In the other matter, Cairn had reorganised its subsidiaries. In 2006-07, Cairn UK transferred shares of Cairn Holding to Cairn India. The government held that the company had made capital gains and demanded ₹31,881 crore in taxes. When Cairn was to sell its 10% stake in Cairn India to Vedanta, the government invoked the retrospective tax law to attach the stake. The company dragged the government into a contentious international arbitration and obtained orders for attachment of certain overseas Indian assets, making the controversy messier.
The whole unsavoury matter had dented India’s impeccable global standing as an attractive investment destination, putting a question mark on the legal certainty of tax laws that investors value most while taking investment decisions.
With this latest decision to annul the earlier one, doubts on the legal certainty of Indian tax laws have been set at rest amongst investors. The 2021 changes have annulled the retrospective application of the 2012 amendment, leaving its effect prospectively.
India's Telecom Story
When India opened its telecom sector to private investment in 1994, several Indian companies made aggressive and unrealistic bids, soon finding themselves stuck in a financial jam, unable to pay their dues. In the gridlock, the growth of the telecom sector came to a grinding halt and also left banks in a quandary. The New Telecom Policy in 1999 (NTP) allowed telcos to migrate to a new telecom policy regime, where license fees were fixed as a share of revenue and spectrum usage charges (SUC) as a share of the revenue.
Post NTP, the telecom sector witnessed unprecedented growth, mainly in mobile telephony. A new slogan emerged for the common man: “Roti, Kapda, Mobile aur Makaan”.
India’s telecom growth story was cited in Ivy league institutions as an example of successful reforms, which resulted in new innovations, technologies, services and start-ups.
It was thus ironic that the Indian telecom sector, the flagship of India’s reforms and harbinger of economic growth, came to a passe when it was struggling for survival.
Vi Was On the Brink of Collapse
After the entry of Reliance Jio, which resulted in a cut-throat price war and disrupted the telecom market, most operators folded up. There was only one — Bharti Airtel — that was able to survive; Vodafone-Idea (Vi) was gasping with a staggering debt of ₹1.8 lakh crore, of which ₹1.5 lakh crore was payable to the Indian government. The outstanding included deferred spectrum dues of ₹96,270 crores, AGR dues of ₹58,400 crore, and a bank debt of ₹23,080 crore. Vi had been losing customer base rapidly and lenders had lost faith.
The former Chairman of Vi, Kumaramangalam Birla, wrote to the Cabinet Secretary offering his stake in Vi to the Centre or any firm approved by the government for free.
It appeared that it was only a matter of time that Vi would collapse, and the ensuing duopoly would hardly mean any effective competition in the market, leaving consumers with little choice and at the mercy of existing operators. The telecom sector appeared to be on a ventilator, most telcos were grappling with accumulated dues for AGR and spectrum charges, etc. running into a mammoth amount of ₹8 lakh crores.
The much needed, bold relief package to revive the struggling telecom sector has come after much wrangling. It includes a four-year moratorium on payment of statutory dues by telecom companies, revising the definition of AGR to exclude non-telecom revenue, rationalising spectrum charges, permitting 100% (instead of earlier 49%) foreign direct investment (FDI) in the telecom sector through the automatic route, raising the tenure of spectrum from 20 to 30 years, allowing free sharing of spectrum between carriers, etc.
The relief measures have come just in time, and have revived the shares of these telcos. The step not only gives them a breather from immediate payment obligations and ploughs back billions of dollars thus saved into service operations, but the 100% FDI route may also infuse new funds from UK promoters in Vodafone and Airtel.
Competition As a Guiding Principle
Meanwhile, the government has referred to the need for telecom services reaching even marginalised sections of society and remote areas. To achieve that, there should be a stronger and bigger role for BSNL, both financially as well as managerially, which should also be galvanised to improve its operational role in remote areas. The company has a huge infrastructure and land bank and can perform its legitimate role as a national carrier. It can prove to be a fierce competitor with 4G spectrum and additional support, turning the competition landscape into a ‘3+1’ arena.
During the NTP 1999, competition was at the core of reforms, and once again, maintaining effective and healthy competition should be at the core of future policies.
(Dhanendra Kumar is formerly Chairman, Competition Commission of India (CCI), Executive Director for India at the World Bank and was Additional Secretary, Telecom during New Telecom Policy 1999. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)
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