#dnaEdit: What effect will Vodafone tax dispute have on global investors?

Like all tax disputes, the one that involves Vodafone and the government is quite a tangled one. The company has been absolved of tax liability of Rs3200 crore in a differential pricing of its shares. But it has not had a smooth ride in the other tax case where the company acquired the Indian operations of Hutchison Whampoa in 2007 in a deal that was clinched in Cayman Islands not in India, where the business is run, not in United Kingdom where Vodafone is headquartered, and not in Hong Kong where Hutchison Whampoa is headquartered. 

The Indian tax authorities slapped capital gains tax on Vodafone amounting to Rs11,000 crore. Vodafone filed an appeal in Bombay High Court, but the court upheld the claim. Then the company went in appeal to the Supreme Court, and the apex court verdict went in its favour. Then finance minister Pranab Mukherjee in his Budget of 2012, moved an amendment which the critics interpreted as an unfair retrospective tax, and the government of the day defended it saying that the amendment made explicit what was implicit in the tax law. The amendment was flayed and lampooned with critics saying that it meant that it would force everyone to pay retrospective taxes going back 50 years. The government clarified that the amendment would only affect transactions made in the previous seven years. Meanwhile, Vodafone sought international arbitration, but there has been no breakthrough. Now the tax authorities have sent a tax reminder, with the implied warning of seizure of assets for failure to pay the dues.

Vodafone has hit back with a political statement, comparing Prime Minister Narendra Modi seeking foreign investments and offering a business-friendly environment. The critics who had flayed the government earlier for its retrogressive retrospective tax measure have again come out firing their guns. The BJP in opposition had criticised the Congress and Mukherjee on the retrospective tax, and when the BJP rode to power in 2014, it was expected that it would undo Mukherjee’s amendment. Union finance minister Arun Jaitley has been promising a stable tax regime, by which he meant that there would not be nasty surprises like the retrospective tax measures. It is intriguing then that the Modi government has not yet removed the retrospective tax measure from the statute book. As long as it remains there, the tax officials cannot pretend that it is not there.

The core issue remains. Whether Vodafone acquiring the Indian operations of Hutchison Whampoa can duck reasonable tax dues when it has not paid taxes anywhere else. The technical point is that the tax claim was non-existent at the time of the acquisition. It is a thin argument because then the deal could have been effected in India itself. The fact that it was executed in a fourth place goes to show that it was meant to take advantage of a tax haven. It is interesting to note that in a similar case, Vodafone came to an out-of-court settlement with British tax authorities over profits made in Luxembourg for the British shareholders of the company. There is also the fact that Vodafone generally has a transparent tax compliance system. In its latest declaration, the company has showed that it has contributed British Pounds 412 million in direct taxes in India, non-tax direct revenue contribution of British Pounds 568 million, and British Pounds 1053 million in 2014-15. It should be understood that the government demand is not punitive, and Vodafone’s bid to get out of the liability is understandable.