Just ahead of the Union Budget for 2016-17, tax terrorism, which has already taken a toll on investor sentiment, seems to be returning to haunt the multinational companies in India. This, despite finance minister Arun Jaitley and other NDA ministers promising a predictable tax regime to improve the ease of doing business in the country.
According to a report in Bloomberg, the Indian tax authorities have sent a notice to Vodafone Plc, which is engaged in an arbitration with the government in a tax case, threatening to seize assets if the company did not pay up $2.1 billion or Rs 14,300 crore in taxes.
According to the report, Anil Sant, deputy commissioner of income tax, has sent the notice on 4 February to Vodafone International Holdings BV.
The tax pertains to a transaction the company did in 2007, in which it bought out Hutchison's 67 percent stake in its telecom JV in India for about $11 billion. The deal was executed through companies that are not based in India.
However, the income tax department slapped a basic capital tax demand of Rs 7,990 crore on the transaction. Though the company won a court battle in the case, the government later changed the law to retrospectively apply the tax on such transactions.
Apart from Vodafone, a clutch of other multinational companies such as Cairn Energy and Nokia have also been slapped such tax demands by the Indian authorities. The tax law had severely damaged the country's image among the investor community.
While the law was brought in by the erstwhile UPA regime, there were expectations that the NDA government under Narendra Modi, touted to be much more business-friendly than the predecessor, would put an end to the tax terrorism.
However, the latest development in the Vodafone case suggests that the NDA too may be going the UPA way.
The government's move assumes significance as Vodafone's international arbitration proceedings against India are currently on in the case.
It is also noteworthy that it comes at a time when the government rolling out schemes after schemes to attract foreign investors and bring about a change in the perception about India.
According to Mukesh Butani, managing partner at BMR Legal, the world is watching Cairn and Vodafone cases both under going international arbitration.
"...The decisions are going to play a lot in the minds of investors. Whatever the government wants to do, it must do it sensibly and quickly," he had recently told the Financial Express in an interview.
But going by the twist in the Vodafone tale, clearly the government is more interested in talking and managing headlines than doing something to bring about a real change.