For Modi administration, reducing tax litigation is a policy priority but the dispute with Vodafone Group Plc is on a different league
New Delhi: 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.
For the Narendra Modi administration, reducing tax litigation is a policy priority but the dispute with Vodafone Group Plc on its $11 billion offshore deal acquiring Hutchison Essar Ltd.—later renamed Vodafone India Ltd—is on a different league.
An arbitration panel that 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 made to tackle the corporate practice of aggressive tax avoidance. Accepting the arbitration panel’s decision could have implications for future cases and cannot be overlooked.
“The judgement if I understand is not about the retrospective tax law change. It invokes BIPA. 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 finance ministry had said it will consult its legal counsels on what to do.
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 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 Indian telecom business, through a complex web of subsidiaries across countries. The acquisition executed by Vodafone’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 sought to amend the law to clarify that such deals 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 Rs. 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 quoted above.