Vodafone tax case review in Supreme Court tomorrow

The Supreme Court tomorrow will hear the government’s appeal in the $2.2 billion Vodafone tax case. The government has, with a review petition, asked the court to reconsider its verdict delivered in January which sided with Vodafone and helped improve foreign investor confidence.

But last week, in the union budget, Finance Minister Pranab Mukherjee proposed changes to tax laws retrospectively to 1963. That move, analysts believe, is the government’s attept at getting around the court’s decision that the government cannot tax a deal between two foreign entities, even if the transaction includes an Indian asset.

India had sought $2.2 billion from London-listed Vodafone in tax after its purchase of Indian assets from Hong Kong-listed Hutchison Whampoa Ltd.

Vodafone is the largest overseas corporate investor in India, but its long-running dispute has come to symbolise the perils foreign firms face doing business in the country. The Finance Minister’s proposal will allow the country to retrospectively tax cross-border transactions in which the underlying assets are located in India.

Business figures have criticized the amendment, which the head of the Confederation of Indian Industries said would "create an impression of India being an investor unfriendly country especially at a time when we need urgent investment."

"This is most retrograde. Our policymakers should realize we do not live in isolation. We need FDI, foreign technology and capital," said Deepak Parekh, chairman of Housing Development Finance Corp, India's biggest mortgage lender.

Mr Mukherjee has sought to allay industry worries by asserting that the new amendment would not duplicate tax paid in other jurisdictions, and only seeks to ensure tax is paid on deals involving the transfer of Indian assets.

Vodafone's deal is not unique. Various other acquisitions involving overseas deals that appeared closed after the Supreme Court ruling could be affected by the proposal.

Kraft Foods Inc's 2010 acquisition of Cadbury's Indian business and deals involving Indian assets sold by AT&T Inc and SABMiller Plc's purchase of Fosters would be at risk under the new amendment.

"The proposal...raises a question as to whether foreign investments are protected in India," wrote Nitish Desai Associates, a legal and tax advisory firm, in a research report.

Legal and tax experts say that while the amendment will see foreign investors act more cautiously in future deals involving Indian assets, the government's decision to throw past deals back into turmoil will only sour overseas investment appetite.

"The government is saying it is clarifying its position," said Amrish Shah, national leader, transaction tax, Ernst & Young India. "But on past deals, it has muddied the water.”

(Reported by A Vaidyanathan with inputs from Reuters)

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Budget Bombshell: tax laws amended, could affect Vodafone case

Mumbai: 

In a move that could hurt foreign investment, the government has in the union budget today proposed changes to the Income Tax law that could shake foreign investor confidence. Analysts say the amendments could also give the government the right to tax Vodafone billions of dollars for its acquisition of Hutch.

In January, Vodafone won its case in the Supreme Court against the government, who had slapped a 2.2 billion dollar bill on the British telecom giant. The government has filed a review petition against that verdict in the Supreme Court – effectively, it has asked the court to re-consider its judgement.

Even as that case is being heard, the fine print to the budget presented by Finance Minister Pranab Mukherjee suggests changes to income tax laws retrospectively from 1962. The idea is to give India the right to tax cross-border deals if they involve Indian assets. Finance Secretary R S Gujral told NDTV Profit that Vodafone’s’ case will be decided in court, and that the changes proposed today will be used to assess current deals. According to Reuters, Mr Gujral said there was no plan to raise a fresh demand for taxes with Vodafone.

"We are examining this proposed decision with our lawyers, but we do not believe this retrospective change in tax law should have any impact on the final judgment handed down by the Supreme Court in our tax case. We continue to have faith in the Indian judicial system," a Vodafone spokesperson told NDTV.

Tax professionals said that the potential law change is likely to come in for challenge. "They have amended the law because the Supreme Court found the law deficient on some grounds," said Neeru Ahuja, a partner at Deloitte Haskins & Sells, referring to the Vodafone case. "Now of course the issue is: can the government legitimately do this," she said.

The proposed amendment in tax rules may also be also significant for other multi-national companies including Kraft Foods, SABMiller and AT&T Inc, which also face potential tax demands in India over cross-border deals.

In 2007, Vodafone acquired 67% stake in Hutchison Essar, a mobile phone operator in India in 2007. The deal was between, Vodafone International Holdings BV - a Dutch subsidiary of the UK firm and CGP Investments, a Cayman Islands company which held the Indian telecom assets of Hutchison.

The deal was for Rs 55,000 crore or $11.5 billion. The tax department said the sale was taxable because the assets acquired by Vodafone were based in India. It said that Indian laws make the buyer responsible for paying capital gains tax to the government.

Vodafone had failed to deduct or withhold capital gains tax at the time of purchase. Capital gains tax is imposed on the profit earned after selling an asset. Vodafone was slapped with a bill of 2.2 billion dollars. Vodafone claimed that India could not levy taxes because the transaction was made between non-Indian companies outside the country.

The Supreme Court agreed, stating that Indian tax officials do not have jurisdiction over a deal between two global companies, even if the assets involved in that deal are located in India.

Experts have expressed an outrage over the decision.“The government has challenged the Supreme Court,” Surjit Bhalla, chairman Ox(u)s Investment. “The decision will affect investor sentiment,” Ketan Dalal of PriceWaterhouseCoopers, a consultancy firm said.

(With inputs from Reuters)

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Budget Bombshell: Vodafone verdict prompts changes to tax laws

New Delhi: 

In a move that will have far-reaching impact on foreign investment and the Vodafone tax case, the government has proposed an amendment to the Income tax act from April 1, 1962 that would allow it to tax transactions like Vodafone's acquisition of Hutch. 

The government has quietly inserted an amendment to provisions of the Income Tax Act to tax overseas transfer of shares that hold underlying assets in India like in the Vodafone situation. The government plans enforce the amendment with retrospective effect from 1962.

According to R S Gujral, finance secretary, transactions like Vodafone are subject to taxes in India.

“The new amendment is only a clarification reiterating the point that such transactions are to be taxed in India,” he said.

He also said that the 10 per cent withholding tax should have been levied on Vodafone.

He said that the government expects to recover Rs 35,000 to Rs 40,000 crore from cases similar to Vodafone and that the figure included Vodafone.

This means the government has changed laws with retrospective effect (1962).

Experts have expressed an outrage over the decision.

“The government has challenged the Supreme Court,” Surjit Bhalla, chairman Ox(u)s Investment.

“The decision will affect investor sentiment,” Ketan Dalal of PriceWaterhouseCoopers, a consultancy firm said.

The BSE Sensex shed 1.3 per cent at 3.30 pm on Friday.

On 20 January 2012, the Supreme Court ruled that Vodafone, the British telecom giant does not have to pay taxes and penalties for the transaction that saw the company acquire 67 per cent stake in Hutchison Essar, a mobile phone operator in India in 2007. The deal was for 55,000 crore or $11.5 billion.

The Supreme Court had said that Indian tax officials do not have jurisdiction over a deal between two global companies, even if the assets involved in that deal are located in India. 

The Supreme Court had said that the Vodafone tax case was an "eye-opener" for Indian legislature to take measures to meet such unprecedented situations which arise due to "what we lack in our regulatory laws".

"Case in hand is an eye-opener of what we lack in our regulatory laws and what measures we have to take to meet the various unprecedented situations, that too without sacrificing national interest," Justice K S Radhakrishnan, who wrote a separate judgment concurring with the findings of Chief Justice S H Kapadia and Justice Swatanter Kumar had said.

The court said insufficient legislation might give opportunities for money laundering and tax evasion adding "it is imperative that Indian Parliament would address all these issues with utmost urgency".

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