In a strong hint that it won’t take the Vodafone retro tax matter lying down, the government said that the order by the international tribunal goes against India’s “sovereign right to tax”.
The government’s latest stance indicated that the immediate implementation of the order could be unlikely because India sees the whole thing as unacceptable.
In India’s view, the deal in question — acquiring controlling interest in Hutch Whampoa’s India telecom assets — was deliberately structured in such manner as to avoid paying tax in India. The Bombay HC had also ruled in India’s favour regarding Vodafone’s failure to deduct capital gains tax, officials noted.
In essence, the Indian government has taken issue with Vodafone moving an international tribunal while legal recourse was still available in India.
Officials said that the government has yet to take a final stand based on legal views. According to sources, there are two options that the Indian government could go for at this point. First, it may not implement the order. Second, it could challenge the order.
It is worth recalling that the Indian government had, in 2012, changed tax rules, making it possible to levy tax on Vodafone on retrospective basis.
Last month, an international arbitration tribunal had ruled that the Indian government’s forcing of tax liability on Vodafone, along with penalties and interests, violated a pact between India and the Netherlands.
The matter pertains to the Indian tax department’s demand of Rs 20,000 crore from the British telecom company, with the case originating from the manner in which the telco entered India through a deal.
In 2007, Vodafone had bought controlling stake in Hutchison Essar. The deal, valued at $11.2 billion, had taken place at an overseas location. India’s tax department had contended that Vodafone should’ve had withheld tax on the deal, and had subsequently shot off a notice to the company seeking Rs 11,218 crore, later added with penalties of Rs 7,900 crore.
It may be noted here that the tribunal’s order had cited a violation by India of the India-Netherlands Bilateral Investment Protection Agreement (BIPA). The tribunal ruling held that India had breached “guarantee of fair and equitable treatment” of the terms laid out in the pact.
The tribunal had also censured India by saying that “such breaches of the international treaty should cease”.
But Indian officials are unhappy about the order that was based on this agreement. An official source, requesting anonymity, told ToI: “While we have said that India is against retrospective taxation, a bilateral investment agreement is for protection and facilitation of investment. It has nothing to do with tax policy… A tax claim cannot be used to invoke BIPA.”
The government is of the opinion that it is necessary to not let the matter rest because it fears other companies could also feel encouraged to use BIPA in this manner in future.
While the cost implication for India in this case is a mere Rs 85 crore (to be paid to Vodafone on account of legal costs), what is likely weighing on the government mind is the upcoming arbitration involving UK’s Cairn Energy.
There is a possibility that India may now take the arbitration order to the Singapore High Court. There are talks of similar, now-settled cases involving other parties. In one such instance, the order had been successfully challenged and upheld by the Court of Appeals.
India is also unhappy about “these tribunals acting like super states,” said an official. They don’t have the power to decide on what is the exclusive domain of Parliaments or courts, he contended.