The far-reaching impact of today's Vodafone order

India's reputation for tax terrorism once worried foreign investors

TELECOM IT-M&A/VODAFONE GROUP-EU Representational image | Reuters

Less than a month after his passing, one of the less lauded legacies of Pranab Mukherjee got laid to rest on Friday with the international arbitration order in favour of Vodafone in the infamous retrospective tax case. Though, lingering on for posterity would be the terminology the strong-arm tactic spawned in the corridors of corporate business not just in India, but around the world—tax terrorism.

The Permanent Court of Arbitration at The Hague had ruled that the conduct of India’s tax department was “in breach of fair and equitable treatment.”

As the Narendra Modi government strives hard to improve India’s ‘ease of business’ index and attract global businesses to ‘Make in India’, today’s order could well give him the opening to do away with provisions like these which has the country struck with the derogatory epithet of a ‘tax terrorist’ not conducive to foreign investment.

The post-COVID economic scenario, if you needed any more reasons, makes it all the more pressing. No wonder, business and thought leaders wasted no time in calling for a repeal.

“In retrospect, the tax demand on Vodafone scared away foreign investors and hurt India’s image as a business friendly destination,” admitted Milind Deora, a former telecom minister in the UPA government. “Hopefully today’s judgement will serve as a reminder for current and prospective governments to do away with retrospective laws,” he added.

Former Infosys director T.V.Mohandas Pai was more blunt. “The then Govt destroyed the trust of citizens and investors by this retro law. Spoiled India’s name, need to reverse!” he tweeted.

“Hopefully, the Indian government will learn from this arbitration that an attractive investment climate requires that they respect the rule of law rather than undermine it,” Prof. Nigam Nuggehalli, Dean, School of Law at BML Munjal University told THE WEEK.

The setback to Indian government apart, there are positive takeaways for businesses.

“India is still locked in several such disputes with a series of companies. In this respect, [this order] will end the uncertainty on the issue and address concerns of foreign companies looking to invest in India.” points out Dr Vivek Bindra, motivational speaker and founder & CEO of Bada Business.

The Modi government’s stance that it will not levy any retrospective tax in the future would also help.

The quagmire between the Indian government and Vodafone stems back to mergers and acquisitions in India’s booming mobile telephony sector in the last decade or so. Hong Kong’s Hutchison Whampoa, operating in 16 telecom circles across the country including the lucrative Mumbai metro circle (in local partnership with Essar) sold their stake to European telephony heavyweight Vodafone plc. The February 2007 acquisition of 67 per cent of Li Ka Shing Holdings in Hutch-Essar for 1.1 billion dollars (the transaction closed in May) made Vodafone a dominant player in India’s telecom sector, controlling top revenue earning circles like Mumbai, Delhi and Kolkata, beside others. The ‘Hutch’ brand, which converted to ‘Vodafone’ soon after, was then riding a high of popular branding, thanks mainly to its ad campaign featuring a little boy with a pug and the unforgettable tagline ‘whereever you go, our network follows.’

But, dark clouds soon gathered. The tax man came calling arguing that the purchase of the assets of an Indian company were liable to be taxed in India—pay up Rs 7,990 crore for failing to deduct capital gains tax over the acquisition, Mukherjee’s ministry demanded.

However Vodafone, a multinational British firm which was then the world’s biggest telecom company, argued there wasn’t any tax obligation. It pointed out how it had entered Indian business through its Netherland subsidiary and the deal, concluded in the offshore tax haven of Cayman Islands was between a Dutch company and one from Hong Kong. India had no jurisdiction or rightful claim.

But Mukherjee’s ministry dug in its heels, and the case went all the way to the Supreme Court. In January 2012, the apex court sided with Vodafone, saying that India’s IT department had no jurisdiction to levy tax on an overseas transaction between companies incorporated outside India.

Then, infamously, Mukherjee went on a vengeful spree by amending the Income Tax Act with retrospective effect to ensure that any financial transaction by an Indian company, even if happened abroad, was liable to be taxed by India. Retrospectively meant the law would apply to Vodafone, too—five months after the SC judgement, the government had changed the law, and announced it would charge 20,000 crore in tax and fines from Vodafone.

“The Indian government was blatantly unfair,” points out Nuggehalli. “The retrospective amendment that overturned the decision of the highest court of the land was badly drafted in its wide generalities and carried a perverse sense of vindictiveness.”

The pressure from the Indian government did have an effect on Vodafone—top honchos of the company were soon caught up in conflict resolution and parleys with the govt officials. Once it seemed that Mukherjee would not budge, Vodafone evoked the India-Netherlands bilateral investment treaty in 2013, followed by arbitration and approaching the International Court of Justice in 2016, a long saga which culminated in today’s verdict.

For Vodafone, it is the second solace of September. Earlier this month, the Supreme Court had given it relief from paying its aggregated gross revenue dues, estimated at above Rs 50,000 crore, by giving it a ten year staggered payment schedule. Losing revenues, customers and market share and staring at the abyss, this could well be the next-best-thing the company could have hoped for. Not surprisingly, Vodafone Idea shares surged 12 per cent after news of the verdict came through.


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