The latest notice sent by the income-tax department to Vodafone Plc is likely to be seen as a brazen display of "tax terrorism" by a government which had promised to purge the two words from its vocabulary. The government has played down the notice by describing it as "routine", but its warning that the British company's assets could be seized if it failed to pay Rs 14,200 crore in disputed tax to the government is Kafkaesque for three reasons. One, Vodafone is already engaged in an arbitration with the government in the case of a taxation claim for a transaction the company completed in 2007, in which its subsidiaries not based in India bought out Hutchison's 67 per cent stake in its telecom joint venture in India for about $11 billion. And taxation experts question whether there is a provision in the arbitration procedure that allows the I-T department to attach assets if a payment is not made while it is still going on. Second, the action comes just days after the prime minister made a grandiose announcement at the Make in India summit in Mumbai that retrospective taxation was a closed chapter and his government was swiftly working towards a tax regime that was transparent and predictable - something that prompted Vodafone to strike back and say the I-T notice showed a complete disconnect between the government and the tax department. No one can disagree with this, as even the finance minister has been saying at every available public forum that retrospective taxation is a thing of the past.
That brings up the third point. That the I-T notice was a carefully thought-out exercise and not the handiwork of an over-enthusiastic deputy commissioner is suggested by the revenue secretary's tweets that it was a routine exercise, of sending collection notices to all those whose dues are not stayed by any court - and that Vodafone can always appeal for a stay on the order, or approach the next higher authority. This makes a mockery of the arbitration process, and it is ironic that all this drama is happening at a time when almost the entire Narendra Modi Cabinet is busy telling foreign investors in Mumbai why they should change their perception of India as an investment destination. Apart from the absence of any immediate trigger, what makes the timing of the tax notice quite curious is that it came a day after the revelation of the I-T department's decision to extend the freeze on the sale of Cairn India shares owned by UK-based Cairn Energy. It couldn't have been a coincidence that the Cairn case is also under arbitration and both the companies are victims of a law in 2012 that allowed the government to tax transactions dating to 1962 in which two foreign firms exchange an Indian asset. The measure overrode a Supreme Court ruling in January that year.
As the global investor community is watching the Vodafone and Cairn cases closely, the government must act sensibly and quickly to avoid concerns that the country's regulations are becoming increasingly volatile and that foreign companies are becoming targets for a cash-strapped government that is desperate to raise tax revenue. The lingering confusion in the matter would only reinforce the impression that promises made by the highest authorities in the land to jam-packed auditoriums, are in fact empty. Once the prime minister and the finance minister have promised the end of retrospective taxation in public, the actions of their government must be in synergy. A public reversal of stand at the highest level on this demand, followed by a quick conclusion to the arbitration process, is imperative.