Retro tax returns to haunt Vodafone: How the case heightens the disconnect in Modi's talk and walk

The Income Tax department has issued a reminder notice to Vodafone over its Rs 14,200 crore tax dues, at a time when the government is on an overdrive to attract foreign capital into the country. according to the UK firm which has been in a long and protracted battle with India over the issue, the move by the tax department shows the disconnect between Prime Minister Narendra Modi’s promise of a tax-friendly environment and the reality. Here’s is an all you need to knwo about the case: [caption id=“attachment_2629702” align=“alignleft” width=“380”]  Reuters[/caption] What is the case all about? The tax pertains to a transaction Vodafone 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. The company has disputed the tax demand arguing that no tax was due as the transaction was conducted offshore. But the tax department’s contention is that capital gains were made on assets in India. The matter is under international arbitration. However, the I-T department on February 4 sent a reminder notice to Vodafone International Holdings BV seeking Rs 14,200 crore in taxes, which it says are due from its $11 billion acquisition. What is the company’s reaction? “We can confirm that we have received a tax reminder from the Tax Department that also references asset seizures in the event of non-payment,” a companny spokesperson has been quoted as saying in a PTI report. “The Indian government stated in 2014 that existing tax disputes, including ours, would be resolved through the existing judicial process,” Vodafone said in the statement. The company also made a reference to the promise made by Modi at Make in India event in Mumbai on Saturday. “In a week when Prime Minister Modi is promoting a tax-friendly environment for foreign investors - this seems a complete disconnect between the government and the tax department,” Vodafone said. What is the government saying? In a delayed response to the news reports, the government played down the development as a routine one.

1/3 The notice in Vodafone case is a routine exercise of sending collection notice to all those whose dues are not stayed by any court.

— Dr Hasmukh Adhia (@adhia03) February 16, 2016

2/3 The party can always approach assessing office with a request to stay the demand as per law.

— Dr Hasmukh Adhia (@adhia03) February 16, 2016

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3/3 In case assessing officer does not agree, party can go to next higher authority and get a stay.

— Dr Hasmukh Adhia (@adhia03) February 16, 2016

Then where is the disconnect? The income tax department’s “routine exercise” couldn’t have come at a more opportune time. The Modi government is busy devising schemes to attract foreign investment. The government has only last week launched the Make in India week in Mumbai - a jamboree touted as the largest business expo hosted by the country. According to ANI, as many as 2,500 foreign delegates and 8,000 representatives of Indian companies are participating in the event. Moreover, at the inauguration of the event, Modi said: We have carried out a number of corrections on the taxation front. We have said we will not resort to retrospective taxation. And I repeat this commitment once again. We are also swiftly working towards making our tax regime transparent, stable and predictable. This is the disconnect Vodafone is complaining about. Precisely, PM Modi is not walking his talk. Making promises is one thing, but implementing is another. Industrialist Ratan Tata had recently spoken about precisely this disconnect at a recent function when he said people would come to India if it makes business sense for them, either in terms of cost or closeness to the market and raw material and fair prices. “…The real test comes when they are making their due diligence to decide whether India is the place to invest, not just on the basis of Mr Modi’s promise,” he had said.