A day after finance minister Pranab Mukherjee stoutly defended retrospective amendments to tax law and the Lok Sabha approved them, the government on Wednesday said the tax notice sent to Vodafone earlier remained valid, but the company might receive an updated communication with a hike in interest component. It has also made it clear that Vodafone might also be asked to pay penalty for the delay in payment.
Vodafone said the government’s stand was disappointing and was studying the new legislation, but added the company remained a committed investor in India.
However, analysts believe the government’s aggressive posturing right now could be a strategic one, partly in anticipation of the company resorting to any available judicial remedy. Confident that the new legislation can stand judicial scrutiny, the government might later relent on the quantum of payment demanded from the telecom major and might even look at a waiver of penalty.
Although tax experts contested the penalty on Vodafone saying such punitive measures can taken only if a mala fide intent to evade tax was proved, government sources asserted there was no case for a waiver. Finance secretary RS Gujral too held this view in interviews given to news channels. This would mean that for the 2007 Vodafone-Hutch deal executed in Cayman Islands, Vodafone will be asked to pay up over Rs 20,000 crore as withholding tax plus interest and penalty on capital gains made by the seller Hutchison Whampoa.
Ernst & Young tax market leader Sudhir Kapadia said: ?As a general rule, for all retrospective amendments, it is not a good tax policy to levy penalty. By its very nature, penalty should arise only where there is mala fide intention to evade tax.?
The UK-based Vodafone, the world’s largest telcom company by sales, is likely to be asked to pay Rs 7,900 crore as capital gains tax, Rs 7,900 crore as penalty and over Rs 4,400 crore as interest. ?Till March, the interest on the capital gains tax was Rs 4,300 crore. Another Rs 100 crore might have to be added to the interest. We will issue a show cause notice to that effect,? a government official said.
In January, the Supreme Court ruled that Indian tax authorities did not have jurisdiction over the cross-border transaction even if Indian assets were involved, a verdict which the government is seeking to overcome with retrospective clarificatory amendment to Income Tax Act 1961.
The official said once the Finance Bill is passed, the tax demand on Vodafone will automatically stand as the government has included a validation clause. The clause gives the tax department emergency powers to override all types of court orders including from the Supreme Court. Tucked away as Clause 113 of the Finance Bill, the ?validation clause? says it will operate ?notwithstanding anything contained in any judgment, decree or order of any court or tribunal or any authority.?
Vodafone said in a statement on Wednesday: ?We are studying the legislation as amended, and will take all possible steps to safeguard our shareholders’ interests. It would be grossly unjust if, on the basis of legislation passed five years after the event, Vodafone were to be charged tax on a gain made by someone else, especially where the Indian Supreme Court unambiguously ruled that no tax was payable in India according to the laws of India in force in 2007. Given this clarity, there was no legal basis for Vodafone to withhold tax.? The company said it continued to be a ?very committed investor? in India.
The relevant transaction consummated in 2007 was an offshore deal between two foreign players ? one based in the Netherlands and another in the Cayman Islands. Vodafone entered India in February 2007 when it acquired Hutchison’s controlling stake of 67% in the then Hutchison Essar. Hutchison controlled its Indian subsidiary through a Cayman Islands company called CGP, whose shares were sold to Vodafone.
Finance minister Pranab Mukherjee on Tuesday strongly defended retrospective amendments to tax law, stressing the government would not be deterred by the SC’s verdict against it in the Vodafone case. Refusing to water down any of the clarificatory amendments, Mukherjee said India cannot be a ?tax haven? merely for attracting investment and cited the fact the UK government also made such retrospective changes in tax laws.
