Reviewing Taxation (Laws) Amendment, 2021 in Times of Global Capital Code

By Anmol Ratan, Fourth Year Student at NLSIU Bangalore

Back in 2010, Dani Rodrik, a renowned economist at Harvard proposed the idea of the political trilemma and hyper-globalisation in his book, The Globalisation Paradox: Democracy and the Future of the World Economy (W.W. Norton, 2010). Over the course of his book Rodrik hinted at the latent yet potent tension amidst national sovereignty, democracy and hyper-globalisation’. Calling the trio the Political Trilemma of the World Economy, he argued that a nation cannot have all the three constituent phenomena all at once. It was also put forth by him that the neoliberal agenda of hyper-globalisation is not just hostile to the ideals of sovereignty and democracy but is also counterintuitive to their project. While some have disputed Rodrik’s bold claim for being abstract, there is more to it than what meets the eye. Rodrik has illustrated his thesis and meta-argument well in his book, however, his proposed idea of the sheer incongruity of hyper-globalisation with sovereignty and democracy seems to have been reinforced yet again by the recent developments in the laws of taxation.

World history bears testimony to the fact that taxation has mostly been viewed as a tinderbox which could easily explode into raging fires of public unrest and global economic and political turmoil. While there are varied points of contention and concern that may arise from the meta-issue of taxation, one of the most recent ones is its relationship with nation-states, or its lack thereof. With the recent developments such as the Taxation Laws (Amendment) Bill, 2021 in India as well as the call for a global corporate tax regime, taxation evidently epitomises what Rodrik called ‘the subversion of democracy and sovereignty by the forces of hyper-globalisation’ (Globalisation Paradox: Democracy and the Future of the World Economy W.W. Norton 2010). Over the course of this article, the author rebukes the assumption that taxation subsists to be an absolute sovereign undertaking of the state. The author also examines the aforesaid Bill in order to analyse its impact on the factors of national sovereignty and democracy. Consequently, the author posits that as India already subscribes to the principles of democracy, the Hobson’s choice is now between domestic sovereignty and hyper-globalisation. In conclusion, the author believes that with the recent trends in globalisation of laws, India’s sovereignty is being abandoned for the perks of hyper-globalisation.

Taxation Laws (Amendment) Bill, 2021

On 5th August 2021, the Finance Minister introduced the Taxation Amendment Bill, 2021 (‘the Bill’) in the lower house which effectively amends the Income Tax Act, 1961 (IT Act) as well as the Finance Act, 2012. The bill seeks to undo the grave economic, political and reputational rupture that the 2012 Amendment to the IT Act had caused by imposing the income tax retrospectively on indirect asset transfers. In other words, the amendment to the IT Act imposed a retrospective tax liability on any income earned from the transactions of shares of a company that is incorporated or registered outside India. The new Taxation bill that is yet to be passed as a law, envisages to ‘bury this ghost of retrospective taxation’ by dropping any such tax demands made on transactions that had occurred before May 2012. The proposed Bill, which has already been embraced well in the legal arena, proposes to nullify the tax liabilities imposed in respect of income accruing or arising through or from the transfer of an asset or capital asset subject to certain unconditional criterion. Firstly, the bill mandates that if the assesses (taxpayer) has filed an appeal or petition in regards to their tax liabilities accruing from the 2012 IT Act Amendment, it must be withdrawn or the assessee must provide an undertaking in form of an affidavit to show that they intend to withdraw the same at the earliest. Similarly, the second condition of the Bill mandates the assessee to withdraw any proceedings for arbitration, conciliation or mediation (whether for protection of investment or otherwise). Most significantly, it is also posited that the assessee (such as Cairn and Vodafone) must waive the right to seek or pursue any remedy or claim in regard to their investments, which may be available under any law (whether domestic, municipal or international law) in force or any bilateral agreement (BITs). It also provides for repayment of any taxes (albeit without any interest) that may have already been collected due to the enactment and enforcement of the 2012 amendment. While the amendment surely is an exercise of government’s power under Article 265 of the Indian Constitution, it represents much more than just that. While the market pundits have embraced the government’s move to withdraw the 2012 amendment, there are many who have raised concerns with the bigger picture on display, that of India’s national sovereignty.

In principle, the 2021 Amendment is a move in the right direction, however, it surely does represent the loosening of the State’s reins over its sovereign functions such as taxation. The Finance Minister while introducing the bill in the house, did assert that taxation, as a political and economic undertaking, shall remain a sovereign function of the nation; it will remain ‘intact’ and nothing will be diluted by the introduction of the bill. However, what makes the case of India’s (or any nation’s for that matter) presumably ‘intact’ sovereign right to tax a precarious one is its international obligations in regards to the bilateral and other investment treaties it signs and ratifies. In view of this, it cannot be disputed that, while many factors had contributed and led up to the introduction of the 2021 amendment, one of the most potent and divisive ones was the interplay of domestic laws and international investment treaty obligations as has been manifested by the infamous Vodafone and Cairn cases. By challenging the legitimacy of the 2012 tax provision from behind the protective walls of the India-UK BIT and India-Netherlands BIT respectively, the aforesaid cases raise a question that author seeks to answer:Has the sovereign function of taxation become a handmaiden of ever-extending international order?

Taxation and Sovereignty in International Investment Treaty Law

Until recently, investment treaties such as the India-US BIT and India-Netherland BIT and their allied investment treaty arbitrations were examples of supranational governance activities that went virtually unnoticed. International Investment Treaty Law, also referred to as the ‘Trojan Horse’ by Katherine Pistor (The Code of Capital, 2019), is one such regime that epitomises the classic interplay of neoliberalism and globalisation of the law with national sovereignty and democracy of nation-states. While the scholarship on investment treaty law argues that the purpose of this lex specialis legal regime is aimed to harbour investment and protect interests of foreign investors in host states, it also superimposes the neoliberal idea of market-centrality and market efficiency by facilitating easy and free flow of capital. The rise of the investment treaty law regime has historically revolved around the pursuit of development and the need for efficient and porous transnational financial transfers to facilitate it. Additionally, the genesis of the regime also lies in the rising demand from the private sector players such as corporations and MNEs for private arbitrations and similar dispute resolution mechanisms. As argued by Pistor, the same qualities that make (domestic) law vibrant and relevant for a polity, make it volatile and uncertain in the eyes of foreign investors (The Code of Capital, 2019). It is in order to realign law with the international capitalist order that the frameworks such as that of the investment treaty law tend to inoculate domestic sovereignty of party-states with utter indolence.

In light of the inherent neoliberal bias of the treaty law regime, scholars such as Prof. Sannoy Das (Jindal Global Law School) have also argued that International Investment Law is in fact rotten to its core. Subsequently, like always, neoliberalism attacks the state and its sovereign functions such as taxation. The sovereign right to tax is no longer an absolute one. With principles such as expropriation and fair and equitable treatment, the investment treaty law bolsters its position as a global legal regime that subverts the will of the nation-states and their respective sovereignty. In the context of expropriation, the right to tax is subject to conditions under the International law. As held in the case of EnCana v. Ecuador, state’s tax laws would actually amount to expropriation of foreign investors if the laws are extraordinary, punitive in nature or arbitration in incidence. Similarly, as per the fair and equitable treatment clauses in BITs, the states have an obligation to undertake legal changes, such as the tax amendment in a reasonable and proportionate fashion, such as to not distort the element of legal certainty. In the Cairn Energy case, the tribunal had upheld the sovereign power of India to tax, however it also posited that the power was not absolute. By limiting the powers of the nation-state to independently and unconditionally enact laws, investment treaties and its aligned principles of expropriation and fair and equitable treatment, delinks the role of nation-states from law-making and enforcement process. As has been witnessed in the Cairn case, the impugned treaty regime also led to the attachment of India’s sovereign properties and assets in France (such as Indian Diplomatic Apartments etc.) for the purposes of recovery of unfulfilled arbitral awards. From the sheer dilution of nation-states sovereign powers and functions (such as taxation) to unilateral take-over of sovereign properties and assets, the operation of the investment treaty mechanism epitomizes what was referred to by Rodrik as the ‘Globalisation Backlash’ (Globalisation Paradox: Democracy and the Future of the World Economy W.W. Norton 2010).

Conclusion

Sovereignty is a dynamic concept. It adapts to change. However, what makes sovereignty a complex undertaking to master is its invariable tension with the forces of hyper-globalisation. On a general analysis, law or legal coding has become subservient to the power of the global capital. It is only because the law is designed and assets are legally coded in the way that they are that global commerce, investment and finance thrives without an institution of global state or even a global law. If nation-states are to retain their domestic sovereignty, they have to first take back their law-making and enforcing powers from the hands of global capital which itself is a conduit of hyper-globalisation. At last, if nation-states as an institution want to exist in the future, they have to choose national sovereignty over hyper-globalisation. Until nation-states and the law takes back the power from the capital, domestic sovereignty however dynamic and evolving it may be, will always be subject to assault by the forces of hyper-globalization.