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All you need to know about the Vodafone-India tax dispute

Chaitra Anand
·7-min read

British telco Vodafone Group won a decade-long battle against the Indian government in a case relating to retrospective taxation under which the income tax department had raised a demand of around Rs 22,000 crore on the telecom major.

What does this case pertain to and where did all begin?

Here’s a timeline of all the events that led up to it and how Vodafone eventually emerged the winner:

~ In 2007 Vodafone International Holdings BV decided to expand its footprint in the Indian mobile phone market by buying out Hutchison Essar.

~ The Dutch affiliate of the Vodafone Group, Vodafone International Holdings B.V. (VIH) acquired 67% interest in the Indian telecom company Hutchison Essar Limited (HEL) for $11 billion.

~ This transaction took place in 2007, through an agreement between VIH, and the Hutchison Telecommunications International Limited (HTIL) involving a Cayman Island~ based company CGP Investments Limited (CGP), which in turn, directly and indirectly, held 67% interest in Hutchison Essar Limited (HEL), the Indian company.

~ Following this transaction, the Indian income tax authorities issued a notice demanding payment of $2.2 billion as capital gains tax, which Vodafone contended it was not liable to pay as the transaction between HTIL and VIH did not involve the transfer of any capital asset situated in India.

~ Vodafone maintained that the deal was carried forward entirely offshore, where the Indian tax authorities had no say and continued to operate within the country.

~ But the IT department continued to chase after Vodafone.

~ The matter went up to the Bombay High Court, which decided that Vodafone was liable to pay the taxes as claimed by the income tax authorities.

~ In 2012, on appeal by Vodafone, the Supreme Court reversed the Bombay High Court judgment and held that the company was not liable to pay any tax. It ruled that Vodafone’s actions were ‘within the ambit of the law’.

~ It also suggested that Indian taxmen should ‘look at’ the transaction objectively rather than through the lens of ulterior motive.

~ But the Indian government was intent on recovering Rs 20,000 crore in unpaid taxes, interest and penalty.

~ On March 16, 2012, in the Union Budget, an amendment to the Income Tax Act was inserted, specifying that income arising from sale of shares or units shall be deemed to accrue or arise in India if transfer of a share or other interest in a company or entity had taken place outside India, and the value of the share or unit depended primarily on assets in India.

~ The amendment applied retrospectively from 1962 (when the law had come into effect) and applied to all transactions that had taken place ever since.

~ In effect, the amendment overruled the Supreme Court’s order, making Vodafone liable once again.

~ The revenue officials sought to capitalise through this rule and persisted on pursuing the case against Vodafone. They believed they could net some good cash through this and other high value acquisitions.

~ They insisted on two things: that letting cross-border operators exploit the loopholes would be unfair to domestic firms. And on the flipside, there was also an additional threat that if global bigwigs get away with paying no tax by taking a calculated and clever approach, then domestic companies would follow suit.

~ The UPA government, under then Prime Minister Manmohan Singh, had raised a tax demand of Rs 11,000 crore to Vodafone's $11-billion acquisition of Hutchison Telecom stake in 2009.

~ The then Indian government decided to place tabs on foreign companies by coming up with the General Anti~ Avoidance Rule (GAAR). This rule basically stated that the government could unearth past deals, all the way back to 1962.

~ There was a huge furore following which GAAR was postponed to 2016.

~ The retrospective amendment was a political thunderbolt in the aftermath of which, amidst widespread outrage in the business community, Pranab Mukherjee – the then Finance Minister who had been responsible for the amendment’s passage – resigned and subsequently became India’s President.

~ Pranab Mukherjee’s successor, P Chidambaram, struck a conciliatory tone with Vodafone and ‘persuaded’ the company to not immediately initiate international arbitration. Instead a conciliation process began between the company and the government.

~ In April 2014, however, with the general elections having been announced, Vodafone abandoned the conciliation process and formally notified the government that it was seeking international arbitration on the tax dispute.

~ The notice was served under the India-Netherlands BIPA. In a terse response to the notice, the government said that tax-related issues were not covered under the BIPA.

~ Following Vodafone’s example, several other companies, such as Finland’s Nokia and the UK’s Cairn Energy also sought resolution of their own tax disputes with the Indian government under similar treaties signed by India with other countries.

~ In May 2014, Narendra Modi became Prime Minister. He had run his campaign on the slogan ‘minimum government, maximum governance’ and had committed that he would improve the ‘ease of doing business’ in India.

~ In the first Union Budget presented by Finance Minister Arun Jaitley in July 2014, he indicated that the government’s position on the Vodafone dispute was much the same as that of its predecessor.

~ Vodafone too announced that it intended to continue with the ongoing arbitrations.

~ In 2016, Vodafone moved the International Court of Justice due to a lack of consensus between the parties' arbitrators in finalising a judge for the tax dispute. "The Indian government has raised objections to the application of the treaty to Vodafone International Holdings BV's (VIHBV's) claims and to the jurisdiction of the tribunal under the Dutch BIT," it had said.

~ In June 2016, a tribunal headed by Sir Franklin Berman was set up after Vodafone challenged India using a 2012 legislation that gave it powers to retrospectively tax deals like Vodafone's $11-billion acquisition of 67% stake in the mobile phone business owned by Hutchison Whampoa in 2007.

~ Vodafone challenged the demand of Rs 7,990 crore in capital gains taxes (Rs 22,100 crore after including interest and penalty) under the Netherlands-India Bilateral Investment Treaty (BIT).

~ Meanwhile, Vodafone had served a notice of dispute on the government under the India-UK BIPA in June 2015. Then, in January 2017, it served a notice of arbitration on the government formally initiating a second arbitration. It was against this arbitration process that the government had moved the Delhi High Court claiming that it constituted an ‘abuse of process’ by Vodafone.

~ On May 7, 2018, the Delhi High Court ruled against the government of India’s attempt to restrict multinational telecommunications bigwig Vodafone from pursuing simultaneous international arbitration proceedings before two different tribunals on the same dispute.

~ The government had argued before the Delhi High Court that the initiation of a second round of arbitration by Vodafone – under the India-UK BIPA – while arbitration under the India-Netherlands BIPA was already under way, constituted an an ‘abuse of process’.

~ In its ruling, the court decided that the appropriate forum to decide this issue is the arbitration tribunal itself. While doing so, in its detailed order, the court also clarified several important issues on the bigger topic of international arbitration itself, and the judgement has been read as signalling that India has to become a more arbitration friendly jurisdiction.

~ Vodafone, in the arbitration under the Netherlands-India Bilateral Investment Treaty (BIT), terminated by India in 2016, has secured a comprehensive victory – injunctive as well as monetary relief.

~ The ruling brings an end to one of the most controversial disputes in India under international treaty agreements that it enters into with countries to protect foreign investments.

What this means for India

Indian tax and economic policies need to be fairer and more equitable.

What is the lesson for investors and tax-payers?

Knowing whether a company is paying its dues is important for investors because for one, it is proof that the reported profits do indeed exist.

Two, tax avoidance, even within the confines of law, can have big repercussions. It could tarnish a company’s profits and reputation.

If you’re a tax-paying, law-abiding citizen who pays all the dues and saves the receipts, you may be particular about checking if the company you are investing in is equally above board.

In your own transactions if you come across grey areas in the tax rules, be mindful of the many loopholes which can be manipulated.

With inputs from The Hindu Businessline, Business Standard and Agencies