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Making peace with Vodafone

Government is said to be open to a reconciliation with British telecom giant Vodafone on its six-year old tax dispute. Explainer by Gaurav Choudhury.

business Updated: May 21, 2013 23:31 IST
Gaurav Choudhury
Gaurav Choudhury
Hindustan Times
vodafone,finance bill,Income Tax Act

In Budget 2012-13, the government had introduced a retrospective provision in the finance bill that would empower the government to scrutinise corporate transactions from 1962 — 50 years ago. The government is now said to open to a reconciliation with British telecom giant Vodafone on its six-year old tax dispute. An explainer:

What is retrospective lawmaking?
It is a law that is passed today but which is applicable from days, months or years ago.

Why is it relevant?
Finance Bill 2012, once voted into law by Parliament, will empower authorities to tax companies for acquiring assets in India even if the deal is concluded overseas retrospectively from April 1, 1962.

What are the proposed changes?
As per the changes in Income Tax Act, 1961, any asset which is registered or incorporated outside India shall be deemed to be situated in India if the assets “substantially” located in India.” These amendments will take effect retrospectively from April 1, 1962.

Is this new to India?

No. There are several cases of laws being applicable retrospectively.

Is this a global practice?
Yes. China, the US, the UK and Germany and many other countries in Europe make such laws.

Why is it significant?
It is significant because of the rules it could set for taxation of transactions, which involve transfer of Indian assets, but are concluded overseas. This will potentially allow about 500 transactions for scrutiny by the tax department.

Why was it being introduced?
The move was seen as a direct fallout of the Supreme Court judgment which had ruled that British telecom giant Vodafone wasn’t liable to pay $2 billion (Rs. 11,200 crore or about the size of India’s mid-day meal scheme) in taxes for a transaction that it inked in 2007 to acquire majority stake in mobile phone operator Hutchison Essar. A Cayman Islands-registered arm of Hutchison received the payment from Vodafone.

What is rationale for introducing the new provision?
The government had said the amendment will bring tax certainty and would also make it clear that India has the right to tax similar transactions.

What was the dispute in the Vodafone case?

India’s income tax (I-T) department, in September 2007, issued notices to Vodafone saying it is liable to pay taxes on the transaction. The I-T department’s argument was that the Cayman Islands transaction was essentially a transfer of an Indian asset and therefore Vodafone should have deducted tax at source when it paid Hutchison for the deal.

What was the tax amount involved?
The I-T department quantified Vodafone’s tax liability at Rs. 11,200 crore.

What has been Vodafone’s response to this?
Vodafone has contested it on the basis that no tax was due in any event as the deal was concluded in Cayman Islands.

What did the Supreme Court rule?
In January, the Supreme Court held that tax authorities do not have jurisdiction on an overseas transaction, thus setting aside the Bombay High Court judgement asking the company to pay income tax of Rs. 11,200 crore.

Will the government scrutinise all corporate deals in the past 50 years?
The government has maintained that there is no question of reopening old cases. In exceptional cases, where any case has escaped attention of the tax administration, they can be reopened only for the past six years.

What has been Vodafone’s response to the change in retrospective law?
It has said it does not believe this retrospective change in tax law should have any impact on the final judgment handed down by the Supreme Court.

What is government planning now?
In a move that is likely to soothe frayed nerves of anxious investors, the government is likely to bring to cabinet a proposal to hammer out an out-of-court settlement with the British telecom giant. The law ministry has endorsed the finance ministry’s proposal to settle the row, six months after the latter mooted the plan. The finance ministry, it is learnt, not averse to waive off the interest component on the tax demand that will reduce Vodafone’s liabilities substantially. The government, it is learnt, has received a reconciliation proposal from the company, and has replied that an appropriate authority will examine the request.

The Parthasarathi Shome Commit­tee, set up in July last year to frame a roadmap on tax avoidance proposals, has also favoured doing away with taxing corporate deals retrospectively. The Shome panel had concluded that retrospective application of tax law should be done only in the “rarest of rare cases.”

First Published: May 21, 2013 23:17 IST