Vodafone tax: India Inc. wary about retrospective taxation

Is the industry saying that a transaction involving acquisition of Indian assets, which has not been taxed anywhere else in the world, should not be taxed in India either? Finance secretary RS Gujral wanted to know from industry representatives today when there were repeated queries on the possibility on Vodafone’s acquisition of Indian mobile phone assets in 2007 being taxed retrospectively.

“Are you saying that this transaction should not be taxed and instead excise duty should be raised from 12% to 14%?” Gujral asked.

Gujral’s math works thus: The Vodafone deal, if taxed, would yield the government anywhere between Rs 35,000-36,000 crore. This is quite close to the amount the government could raise by hiking excise duty limit from 12% to 14%. As of now, the Budget proposes to raise excise to 12% from 10% earlier.

From Gujral’s answers, it appears possible that Vodafone may eventually have to pay tax to Indian authorities. Budget 2012-13 has proposed retrospective changes in tax rules and these directly impact Vodafone’s $2.2 billion tax case.

This January, Vodafone won a five-year legal battle against India’s tax office in a Supreme Court ruling which said authorities did not have jurisdiction to tax the company’s 2007 acquisition of Indian mobile phone assets. But tax professionals now say that the potential law change, which goes contrary to the SC ruling, could come in for challenge. The tax department has sought a review of the SC verdict. The review petition is yet to be heard by the court.

On persistent queries from industry representatives on the Vodafone case and their apprehensions that this could act as a deterrent to other foreign investment, Gujral said, “Why should such a transaction not be taxed anywhere in the world? This is not an issue of double taxation and all we have said is that the company should remit 10 percent withholding tax on the amount when transaction was not taxed anywhere else in the world.”

So does this mean the executive and the judiciary will be at loggerheads on this issue?

Gujral said the clause on taxation with retrospective effect does not indicate any uncertainty in Indian business environment and was unlikely to impact FDI inflow.

Two days back, Vodafone had said in a statement it was examining the proposed rule change with its lawyers, but believed there would be no impact.

“We do not believe this retrospective change in tax law should have any impact on the final judgment handed down by the Supreme Court in our tax case. We continue to have faith in the Indian judicial system,” the company had said.

In the Vodafone case, India’s tax office had argued the company’s deal to buy the local mobile phone operations of Hutchison Whampoa was liable for tax because most of the assets were in India.

Vodafone, the world’s largest mobile operator by revenue, had argued that Indian tax authorities had no right to tax the transaction between two foreign entities. Supreme Court ruled that under existing rules, Vodafone was not liable to pay tax on the deal.