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Vodafone India Tax Case Explained

Sep 29, 2020 9:05 AM 3 min read
Editorial

Vodafone = 1; Indian Government = 0

British telecom major Vodafone Group recently won an international arbitration case against the Indian Government in a ₹20,000cr ($2.2bn) retrospective tax dispute.

The ruling by the Permanent Court of Arbitration at the Hague, in some sense, marks the culmination of nearly a decade long tax dispute between the two parties.

It also comes as a breather of sorts for the Indian telecommunication giant amidst talks of it exiting the Indian telecom sector owing to mounting debt and pending AGR dues.

We have a look at this saga and the implications of the ruling for India.

 

How It All Began

It all started way back in 2007, when the Dutch affiliate of the Vodafone Group, Vodafone International Holdings B.V. (VIH) acquired 67% interest in the Indian telecom company Hutchison Essar Limited (HEL) for c. $11bn.

The transaction took place between VIH, and the Hutchison Telecommunications International Limited (HTIL) involving a Cayman Island-based company CGP Investments Limited (CGP), which in turn, directly and indirectly, held 67% interest in Hutchison Essar Limited (HEL), the Indian company.

And here’s what is at the centre of this dispute - the transaction as such involves only non-Indian companies (VIH, HTIL and CGP) and falls out of India’s tax gamut. However, the underlying operating assets that are of value in the transaction sit inside HEL, an Indian company. This concerned the Indian tax department and subsequently morphed into what is essentially a dispute around tax jurisdictions.

As a side note, such structures involving a web of companies set up in preferential tax jurisdictions (such as Cayman Islands) are fairly common legal tax optimisation tactics.

However, according to Indian tax department, Vodafone should have withheld capital gains tax on the deal. They subsequently  issued a notice seeking c. ₹11,218cr , plus ₹7,900cr  in penalties for a total of nearly ₹20,000cr ($2.2bn).

But Vodafone protested! The transaction did not involve the transfer of any capital asset situated in India. We won’t pay, it retorted.

And the matter went to the court.

The Bombay High Court sided with the tax authorities, said Vodafone was liable to pay.

But Vodafone didn’t relent. The matter was taken up by the Supreme Court, and the apex court in 2012 reversed the Bombay HC judgment and held that the company was not liable to pay any tax.

Done?

Not yet.

The same year, then Finance Minister Pranab Mukherjee, introduced the Finance Bill 2012 in the Parliament, seeking among other things, amendment of Section 9 and Section 12 of the Income Tax Act 1961 - the interpretation of which was the foundation of the SC judgment. The Bill became law and the aforesaid sections were amended retrospectively and given effect from 1961.

Following the amendment, the Indian Government renewed its demand of the c. $2.2bn capital gains tax.

This time around, Vodafone cried foul.

Imposition of tax claims through retrospective amendment, even when the final word had already been said by the SC, amounts to a violation of fair and equitable treatment (FET) promised under the India-Netherlands Bilateral Investment Treaty (BIT), Vodafone held. 

The case was then taken to an international court, which ruled in favour of Vodafone. The tribunal also directed India to pay $5.47m to the company as compensation for its legal costs, as per sources.

 

Vodafone India Tax Case Explained 

What Next?

It doesn’t seem like the Indian Government has given up yet, having said that it will contest the compensation awarded to Vodafone. 

Meanwhile, the judgement is being upheld as a welcome order by many against the Indian Government’s draconian retrospective tax rules. A move that could raise investor confidence, especially foreign investors’, and help further India’s reputation as a business-friendly nation. 

However, it is important to note here that India is entangled in more than a dozen such cases against companies, including Cairn Energy over retrospective tax claims, and cancellation of contracts and could end up paying billions in damages if it loses. Not a welcome scenario for an exchequer that is riling under a slumping economy.

FIN.

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