Budget 2012 a step back, will Voda challenge tax rule change?

Will Vodafone challenge the government’s attempt to introduce a tax on international mergers involving Indian assets with retrospective effect?

It seems increasingly likely. For sure, the British telecom giant is in no mood to take this change lying down. Itissued a second statement urging the government to respect an earlier Supreme Court verdict in Vodafone’s favour and exclude the company from the new tax proposal.

“If the Government of India, premised on such proposed amendment, seeks to nullify the verdict of the Supreme Court of India delivered on 20 January 2012 in favor of Vodafone, which as of now is a final and binding declaration of law, it will not merely be a retrograde step as far as foreign direct investment into India is concerned, but will regrettably establish a disinclination on the part of the Government of India to honor the verdict of the highest court of the land, and raise question marks over ’the rule of law’ in India,” Fereshte Sethna, instructing lawyer for the Vodafone tax case, said in the statement.

“By virtue of Vodafone having succeeded in its tax case before the Supreme Court of India, the Government of India must exclude such transaction and carve it out of the scope of any proposed legislation, and thus uphold the rule of law in the country.”

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While a senior government official denied the government was seeking to makeany fresh demand on the British mobile phone giant, tax professionals thought the potential law change is likely to come in for challenge, according to this Reuters report.

In January, the Supreme Court ruled that Indian authorities did not have jurisdiction to tax Vodafone on the deal it struck to enter Indian in 2007 by acquiring a controlling stake in an Indian telecom company from Hong Kong’s Hutchison Whampoa Ltd.

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The deal was struck between Vodafone’s Dutch subsidiary and a Cayman Islands-based company that held Hutchison Whampoa’s India assets. The Supreme Court ruled in Vodafone’s favour.

The proposed tax change would reverse its effect.

The tax proposal, which will affect overseas deals involving Indian assets going back to 1962, was part of the finance bill that accompanies the annual Indian budget, which Finance Minister Pranab Mukherjee unveiled Friday. Mukherjee, however, did not mention the tax proposal in his speech.

Earlier, Vodafone 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 said.

Analysts said the proposed amendment in tax rules may also be significant for other multi-national companies including Kraft Foods, SABMiller and AT&T Inc, which also face potential tax demands in India over cross-border deals.