Vodafone may move SC against tax law

Vodafone is considering a number of actions to thwart any Indian government move to make it pay Rs12,000 crore in tax through a Union Budget proposal to retrospectively tax overseas transactions involving local assets.

Experts, however, see the telecom firm first moving the Supreme Court (SC) to challenge constitutional validity of retrospective amendments before taking any other step.

Vodafone, which has called the amendments “grossly unjust”, had won a five-year legal battle in January when the SC dismissed a $2.2 billion tax demand from authorities raised over the British company’s acquisition of Hutchison’s Indian mobile assets in 2007.

It is widely believed that the Indian government may seek to upturn the verdict through the retrospective law.

Pallavi Bakhru, partner & practice leader, tax & regulatory services, Walker, Chandiok & Co, said, “This move (retrospective tax) could lead to international arbitration under the bilateral trade agreement, questioning India’s loyalty as a signatory. Since Vodafone has already won the tax case in the highest court of the land, the only step remaining now would be expropriation - which means challenging constitutional validity of retrospective amendments over a bilateral treaty.”

If this happens, the Indian government will have to justify its stance, which may be a complex issue.”

But invoking a bilateral trade treaty with the Netherlands, through which the British company invested in India, is not easy and may result in larger international issues with the two governments even taking each other to the court.

The pact between India and the Netherlands allows companies to claim back taxes in case they are forced to pay.

Daksha Baxi, executive director, Khaitan & Co, said, “According to Article 25 of the bilateral trade pact with the Netherlands, the tax being demanded by the Indian government goes against the terms of the treaty, in which case the matter would go to competent tax authorities in both countries, which would have to discuss the tax issue in detail and come to a mutual understanding on the same.”

Harish Salve, legal counsel for Vodafone, said according to reports Vodafone was still in talks with the Indian government and has not yet come to a decision on invoking bilateral trade pact. “However, in case the treaty is invoked, the Indian government will have to abide by that ruling. The possible decision to invoke a retrospective tax law has upset other foreign investors and this could lead to a bloodbath on Dalal Street.”

Experts said the SC’s verdict is likely to be re-examined following a firm legislative intent from the government stating that although it was not mentioned explicitly at the time of Vodafone entering India, the India tax laws implied that all capital gains would be taxed.

Mahesh Uppal, director, Com First (India), a consultancy firm dealing in regulatory affairs, said, “The Indian government has argued that India is not a tax haven and no transaction related to Indian telecom was meant to be tax-free.”

Also, it is also not clear whether the Netherlands would pursue the matter, considering it may have to pay damages to Vodafone, which, in turn, will have to pay to the Indian government as tax.

Rajan Matthews, director, Cellular Operators’ Association of India, said, “The Netherlands government will put pressure on the Indian government to avoid paying Vodafone, which will lead to issues at a political level. Besides, since invoking the treaty would ensure that the tax case is dragged on for much longer than necessary. The best thing for the government is to make a clarification in the law to be used in later judgments, but in this case it should go forth prospectively.”

He said there is a good chance of Vodafone moving the court again against the retrospective law.

If Vodafone invokes the bilateral treaty, it would be third such instance.

Russia’s Sistema and Norway’s Telenor invoked treaties to protect their investments in the country following scrapping of 2G licences.