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The Union finance ministry had earlier said that it would consult its legal counsel on what to do next in the case.
The Union finance ministry had earlier said that it would consult its legal counsel on what to do next in the case.

Centre weighs Voda tax row outcome

  • The row with Vodafone on its offshore deal acquiring Hutchison Essar has implications beyond the legality of retrospective taxes

The government is examining the decision of an arbitration panel last month favouring Vodafone Group Plc in a tax dispute, given its implications for India’s sovereign rights of taxation, according to a government official.

Reducing tax litigation is a policy priority for the Narendra Modi administration but the dispute with Vodafone Group Plc on its $11 billion offshore deal acquiring Hutchison Essar Ltd—later renamed Vodafone India Ltd—has implications beyond the legality of retrospective taxes.

An arbitration committee that had heard both the parties last month ruled that the Indian government should cease its tax claim, which it said was in breach of the protection guaranteed under the Bilateral Investment Protection Agreement (BIPA) signed with the Netherlands in 1995.

The government official, who spoke on condition of anonymity, explained that the arbitration was around the protection granted to foreign investment, not the 2012 retrospective tax law change that India had made to tackle the corporate practice of aggressive tax avoidance.

Accepting the arbitration committee’s decision could have implications for future cases and this cannot be overlooked.

“The judgement if I understand is not about the retrospective tax law change. It invokes the Bilateral Investment Protection Agreement. These are treaties signed (between countries) for protecting investments into each other. No bilateral investment protection treaty deals with taxation, which is a sovereign function. It is upon us to look at it. How can we let it pass," said the official.

The government has not taken a call on the future course of action, the official explained.

Earlier, the Union finance ministry had said it will consult its legal counsel on what to do next.

Given the fact that bilateral investment protection deals are invoked by businesses to seek remedy for tax demands, the government cannot ignore the arbitration award.

The central government asserts that these treaties have nothing to do with taxation.

In January 2012, the Supreme Court had ruled that Vodafone Group Plc’s $11 billion offshore deal acquiring Hutchison Essar Ltd was not taxable in India.

The seller, Hong Kong-listed CK Hutchison Holdings Ltd, had held the majority stake in the Indian telecom business, through a complex web of subsidiaries across countries.

The acquisition executed by Vodafone Group’s Netherlands arm Vodafone International Holdings BV escaped capital gains tax in India as it was an offshore share transaction although the underlying assets were in India.

In the Finance Act that year, the government had sought to amend the law to clarify that such transactions have always been taxable in India even if executed overseas.

The tax dispute eventually went into international arbitration.

Vodafone has not paid the tax demand of 7,900 crore and interest and penalty on it, according to another government official, who also spoke on condition of anonymity.

“The transaction was done in a questionable way with a tax implication in India," said the first official.

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