Should govt restart Vodafone conciliation?

May 29 2014, 04:15 IST
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SummaryWhile the revenue department wants to pursue the retrospective amendment path, a successful conciliation will undoubtedly improve India’s image

Even as the new government gets down to tackle the complexities of the budgetary exercise, it may have to take a call on a controversy that refuses to die down. The chief executive of Vodafone, Vittorio Colao, is reported to have said that the unresolved Vodafone tax issue would be a great opportunity for the new government to “make a statement on how open the country is again”.

The Vodafone case started in 2007 as any tax dispute between the revenue authorities and a taxpayer. Following two rounds of litigation before the Bombay High Court and culminating in the Supreme Court judgment and the subsequent retrospective amendments to the Income-Tax Act in 2012, it spurred the worldwide campaign against the approach of Indian tax authorities.

For a layman, it may appear strange how a company selling its Indian assets for $11 billion would have no liability to pay tax on it. But devious are the ways of structuring of global transactions that allow moving capital to high profit destinations and not paying tax either in the host country or the home country.

The stand of Vodafone is simplicity itself. According to it, under the sale purchase agreement (SPA) of February 11, 2007—between one of its British Virgin Islands subsidiary VIH and a Hutchison group company registered in Cayman Islands, HTIL—the entire share capital of another Hutch group company (CGP Investments Holdings Cayman Islands), comprising one single share, was transferred to VIH for $10.85 billion. This was an offshore deal between two foreign companies for transfer of a share of another foreign company. As the seller, purchaser, the asset and the transfer were all outside India, no tax liability arises in India on capital gains accruing to Hutch.

The Revenue took the stand that a holistic reading of the SPA showed this was a composite transaction for transfer of all business assets, interests, and entitlements of Hutch in its Indian business.

The implications of the SC judgment went beyond the Vodafone case and had bearings on many international acquisitions; hence on tax revenues. Fearing erosion of tax base, Parliament, through Finance Act 2012, amended the Income-Tax Act retrospectively, triggering criticism globally. But the legitimacy of bringing to tax indirect transfers of underlying Indian assets brooks no serious discussion as once territorial nexus is established, every sovereign nation has the right to tax gains arising out of such transactions.

As the controversy snowballed and Vodafone invoked BIPA between

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