For the first time in its 7-year rule, the Narendra Modi government has taken a courageous and progressive policy decision on the economic front — with significant long-term implications — to axe the controversial retrospective tax law. Prime Minister Modi has shown tremendous courage in reversing the regressive tax. Very few leaders in his place anywhere in the world would have gathered the courage to administer the death blow to such a controversial law. Mr Modi, who is unfortunately associated with an arrogant approach to other key issues, deserves full credit for his policy decision on this crucial issue.

Needless to say, the law was bad and illogical to start with. Even as the courts inveighed against the law, the then Finance Minister Pranab Mukherjee went ahead with implementing the retrospective impost — something unheard of in the fiscal history of civilized nations.

Though there were around 17 victims of the draconian law, the Vodafone and Cairn cases shattered the credibility of the Indian government and its economic policies, making the authorities themselves realise that the decision was totally wrong and extremely harmful to the country’s international image and standing. The details of these two cases will surely enter the history books and economic case studies on how wrong a sovereign government can get in its policy measures.

In May 2007, Vodafone bought a majority stake in Hutchison Whampoa for $ 11 billion. The Indian government raised a demand of Rs 7,990 crore in capital gains and withholding tax from Vodafone, arguing that the company should have deducted the tax at source before making the payment to Hutchison. Vodafone went to court and, after losing the case in the Bombay High Court, won the case in the Supreme Court which in 2012 ruled that Vodafone’s interpretation of the law was correct and it did not have to pay the tax. But an adamant Pranab Mukherjee decided to circumvent the Supreme Court’s ruling and went for an amendment to the Finance Act to implement the tax retrospectively. Vodafone then invoked the Bilateral Investment Treaty between India and the Netherlands, signed in 1995 and 2014, and initiated arbitration against India in the Court of Arbitration at the Hague. The court judgement was in favour of Vodafone as it ruled that India had breached the terms of the agreement.

Now take the case of Cairn. In 2007, Cairn UK transferred shares of Cairn India Holdings to Cairn UK, on which the I-T authorities slapped a capital gains tax demand of Rs 24,500 crore. Cairn refused to pay and challenged India’s stand at an arbitration court. The court upheld the stand of Cairn and ordered the Indian government to pay $ 1.23 billion in damages to Cairn plus costs and interest. But the Indian government remained adamant.

Tired by the undue delay and rigid stand of the Indian government, Cairn identified highvalue assets of the Indian government in the US, the UK, Canada, Singapore, France, Mauritius and the Netherlands for enforcing the arbitration award. It also won a favourable judicial order from a French court for seizing 20 properties of the Indian government in the UK. Even at this stage, the Indian government decided to fight it out.

However, realizing the adverse impact of prolonged litigation on the country’s international credibility with international businesses and investors, Prime Minister Modi has finally gathered the courage to take the momentous decision of reversing the government’s stand, not only by scrapping the controversial law but also by paying back the amount collected earlier in the name of this tax.

The government’s latest move will certainly go a long way in furthering the credibility of the Indian government, and this in turn will give a big boost to the flow of foreign investment into the country.