The tax dispute between Vodafone International Holdings and the
Indian Tax Authority was initially settled in January 2012 when
the Supreme Court of India pronounced that the Government of
India (GOI) did not have jurisdiction to tax the offshore
transaction between Vodafone and Hutchison. The Tax Authority
was required to refund the Rs 25 billion (US$455 million) tax
payment already deposited by Vodafone, and the judgment helped
ease the fears of investors about their offshore M&A
However, following the Supreme Court judgment, the GOI took
various initiatives to upturn the verdict by amending
legislation. In particular, in the Union Budget 2012-13, the
finance minister proposed to amend the 1961 Income Tax Act in
order to tax offshore transactions involving any Indian assets.
Most significantly, the amendment would be implemented with
retrospective effect, dating back to April 1 1962.
Under this amendment, all persons, whether resident or not,
would be required to deduct tax at source and pay it to the GOI
if they had business connections in India, even if a
transaction was executed offshore. The retrospective amendment
would enable the GOI to collect tax amounting to approximately
Rs 400 billion (US$7.28 billion).
The GOI has claimed that the amendments have to come with
retrospective effect as they are clarifications in nature. But
this argument has been rejected by many investors and legal
practitioners. They say that interpretation of the law has been
mutually understood between the regulators and businesses over
a long period of time, and the 'clarifications' challenge the
basic assumption of both parties towards the provisions.
Amarchand Mangaldas managing partner Shardul Shroff says:
"The greatest controversy on the income tax amendment is the
fact that changes are made retrospectively. In this case, there
is a strong moral objection against the government for
neglecting the integrity of legal provisions that were
established earlier. Over the years, both investors and the
regulators have established common consent towards how the law
should be interpreted. Suddenly, such interpretations are
disregarded and can be overturned anytime in the
Godrej Consumer Product's executive vice-president of legal
Rajiv Bakshi says it is understandable that the GOI is
tightening up the Income Tax Act in order to prevent tax
avoidance, as this is common international practice in the
current global financial climate. However, he says it is unfair
to investors when earlier agreements are overturned.
"There is a difference between tax saving and tax evasion,"
he says. "When the Indian regulations state the tax free
options for corporations to carry out their transactions, then
surely they have the right to plan their transactions with the
most tax-efficient options. If the government is disregarding
such rights of businesses by amending the law retrospectively,
it is very disrespectful towards investors."
For current and prospective investors, the GOI's initiative
to amend legislation retrospectively has added to the risks and
uncertainty of doing business in India. Strategically, the
financial implications of such risks are hard to quantify as
the GOI could upturn previous rulings at any given time.
Ernst & Young tax partner Rajan Vora says that tax risks
in India have now become a huge hurdle for many potential
investors. "The retrospective regulatory risks in India are
recognised among investors. However, it is the first time that
retrospective amendments are made that will have implications
to such an extent."
He adds: "The amendment, if really passed, will be
disastrous towards the integrity of the Indian tax system.
Investors are very worried about the reliability of the
regulations. The legal compliances they have prepared might
mean nothing in the end if the government decides to upturn the
earlier terms agreed upon."
Vodafone is currently in talks with the GOI and has said
that it might invoke a bilateral trade treaty between India and
the Netherlands if the GOI does not decide to reduce its tax
liabilities following the potential amendments. The Bilateral
Investment Promotion & Protection Agreement (BIPAs) was
signed between India and the Netherlands to promote and protect
investments on a reciprocal basis. The Agreement allows
companies to claim back taxes in cases where they are
unreasonably charged by the other country.
The Netherlands government is also likely to intervene in
the case as it may have to bear the tax liabilities of Vodafone
under the terms in the bilateral trade agreement. In addition,
affected parties might decide to bring this case to
international arbitration should the retrospective amendments
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