Fin Secy's poser: Did Voda offer to take on Hutch's tax dues?

by R Jagannathan

Finance Secretary RS Gujral is a fighter. The man in the bureaucratic hotseat over the Vodafone “retrospective” taxation case and the controversial General Anti-Avoidance Rules (GAAR), which has got every businessman’s goat, has now given a very strong indication that Vodafone may not quite be the innocent caught in the taxman’s web of deceit.

In an interview to Business Standard (read full interview here), Gujral seems to suggest two things: one, that Vodafone got a lower price for Hutchison Essar’s Indian ops probably because it agreed to take on any tax liability, if it did come. And two, the reason why Vodafone is yelling murder is that it thought it would get away with its no-tax gamble, but is now stuck.

The government has always believed it had a strong case since Vodafone was informed by the tax department, even before it had made final payments to Hutchison, that it would have to deduct tax on the transaction.

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If Vodafone still went ahead, it was either overconfident of its interpretation of Indian tax laws compared to even the taxman’s own reading of it, or there was some other reason. The Bombay High Court, for example, did uphold the taxman’s interpretation, even though the Supreme Court didn’t.

[caption id=“attachment_286543” align=“alignleft” width=“380” caption=“The government has always believed it had a strong case since Vodafone was informed by the tax department, even before it had made final payments to Hutchison, that it would have to deduct tax on the transaction.Reuters”]  [/caption]

Says Gujral: “In their own wisdom, Vodafone took a call and remitted the payment (to Hutchison) without withholding the tax. Now, what the (tax) officers, while raising the demand, have also mentioned is, according to their information, an amount higher than the final one paid by Vodafone was offered by some other party (to Hutchison). Perhaps the difference reflects the tax amount.”

Here Gujral is suggesting that Hutchison rejected a deal offering a higher price because Vodafone may have offered to pay tax.

Gujral offers one more bit of argument to question Vodafone’s motive in not withholding tax, which it could have paid under protest or sought an indemnity from Hutchison on it. “One can seek to conclude that Vodafone, in its agreement with Hutchison, took advantage of a lower price and said any responsibility of tax was on its account. That is why Vodafone is fighting so hard. Otherwise, in normal business transactions, if a person is a buyer, he will put a clause that if any tax is levied, the seller would be liable to pay. Clearly, it is an issue in which they took a gamble that perhaps they would be able to avoid tax, and whatever they avoid, becomes their profit.”

Gujral has made his point. It is upto Vodafone now to disprove this by showing that its agreement with Hutchison had no references to who will pay any tax, if it is claimed later.

The finance secretary also makes the point that Vodafone was not an exception. In fact, many other companies were also levied the tax.

As we argued on Monday, Vodafone has not done its cause any good by invoking the Indo-Netherlands Bilateral Investment Treaty. It has claimed two opposite things: that India cannot tax an offshore deal, but the same offshore deal must be protected by India under the Bilateral Treaty.