New Delhi: As the government prepares to revive its Rs 20,000 crore tax demand on Vodafone Group Plc, the finance minister’s clarification on retrospective taxation could invite fresh legal accusations of India enforcing a discriminatory tax regime.
Tax issues: Finance minister Pranab Mukherjee on Monday said that the amendments would not be used to reopen cases where assessments have been completed. Photo: Harikrishna Katragadda/Mint
On Wednesday, ending all speculation about the government showing any leniency to Vodafone and waiving the tax, finance secretary R.S. Gujral told television channel NDTV Profit that Vodafone will have to pay a basic tax of Rs 7,900 crore, an equivalent penalty, and interest of around Rs 4,300 crore to the tax department.
With the validation clause coming into effect after the passage of the Finance Bill, the government will issue a notice to the company, Gujral said.
It is very likely that Vodafone will legally challenge the notice as and when it is served. The fresh clarification issued by finance minister Pranab Mukherjee on Monday about who will be affected by the retrospective tax amendments introduced in the budget may strengthen the claim of discrimination by Vodafone and other companies that may face a similar situation.
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Mint’s Remya Nair says the finance ministry’s stance on retrospective taxation could mean new legal challenges.
Mukherjee said the amendments would not be used to reopen cases where assessments have been completed. Several cases involving transactions similar to the Vodafone one are being contested in courts and the final assessment orders on these are yet to be issued.
“The amendments would have to be defended by the government before the Supreme Court and the present action would give them (Vodafone and other companies) a further ground of unfair distinction between those where the assessments are final and those which are pending,” said B.M. Singh, former chairman of the Central Board of Direct Taxes.
In a statement, Vodafone said it was still studying the legislation and “will take all possible steps to safeguard our shareholders’ interests”.
“It would be grossly unjust if, on the basis of legislation passed five years after the event, Vodafone were to be charged tax on a gain made by someone else, especially where the Indian Supreme Court unambiguously ruled that no tax was payable in India according to the laws of India in force in 2007.”
Vodafone declined to comment on the specific question of possible discrimination in the tax regime.
Vodafone International Holdings BV, a Dutch-registered unit, bought the Indian business operations of Hutchison Telecommunications International Ltd (HTIL) through the sale of a Cayman Islands-based firm called CGP Investments (Holdings) Ltd, a unit of HTIL, also incorporated in the Cayman Islands. The tax department estimated the phone company’s tax liability at more than Rs 11,000 crore. Vodafone and the Indian tax authorities went to court to resolve the issue.
In a 20 January verdict, the Supreme Court ruled in favour of the telecom company, saying the tax department did not have the jurisdiction to tax the transaction. Following the judgement, the government brought in a retrospective amendment to bring similar transactions into the tax net.
“If you look at the cases in the past five-six years, assessment orders in most of the high-profile transactions have not been completed and are in various stages of litigation,” said Sudhir Kapadia, tax markets leader at audit and consultancy firm Ernst and Young. “The assessment order clause looks like mere posturing by the government and is unlikely to benefit many companies.”
Similar cases that are currently being contested in courts deal with the tax implication of Shantha Biotechnics Ltd’s acquisition by Sanofi SA, SABMiller Plc’s global acquisition of Foster’s Group Ltd, and the purchase of a stake in Idea Cellular Ltd from AT&T Inc. by Aditya Birla Nuvo Ltd and Tata Industries.
The Indian government’s move to introduce retrospective amendments led to opposition from many foreign governments, companies and international trade lobby groups. But, during the debate on the Finance Bill, the government defended its right to tax overseas transactions of companies that realize capital gains from the sale of their Indian assets.
The Finance Bill was passed by the Lok Sabha on Tuesday and is awaiting the President’s approval.
Vodafone has already issued a notice to the Indian government in a first step to initiate international arbitration proceedings under the bilateral investment treaty signed between India and the Netherlands.
“With the government not inclined to waive the penalty, Vodafone is left with no option but to appeal to the Supreme Court against the retrospective amendment,” said Ernst and Young’s Kapadia. “The only glimpse of hope for Vodafone is that they were only there in a paying capacity. They did not earn the income but were only paying the consideration. So the question that will be asked will be that if you can impose a retrospective amendment with penal consequences when the company was merely an agent,” he said.
remya.n@livemint.com
