Vodafone tax: Has the FM just dampened cross-border deals?

Does the government have the right to introduce a proposal that affects how foreign company transactions involving Indian assets are taxed with retrospective effect?

According to a Supreme Court lawyer, yes.

The proposal, which was introduced in the Finance Bill, will directly affect Vodafone because it will reopen the company’s $2.2 billion tax case.

In an opinion piece in the UK’s Daily Mail newspaper, Supreme court lawyer Rajeev Dhavan said the apex court’s verdict in favour of Vodafone ‘violated common sense hugely," and that the Indian government was right to seek tax from Vodafone.

In January, Vodafone won a long-standing battle against India’s tax authorities after the Supreme Court ruled that authorities did not have jurisdiction to tax the company’s 2007 acquisition of Indian mobile phone assets through an offshore deal. The proposed tax change will reverse that ruling.

Dhavan said it was wrong to believe that the deal did not affect India, since “shareholding of an Indian company in India changed hands without the new shareholders paying tax.” The Supreme Court, however, had said that under existing rules, Vodafone was not liable to pay tax on the deal.

Dhawan predicted Mukherjee’s amendment would prompt another round of litigation between Indian authorities and Vodafone. “The onus was on government to seek a review and pay back the money deposited by Vodafone,” he wrote in the newspaper. “That was a tall task. Now, the revenue authorities will claim that no refund is to be made due to the change in the law. It is then for Vodafone to challenge the budget amendment….,” he said.

Dhavan is not alone in that view. A report in The Hindu also pointed out that according to legal experts, Parliament has “the power and jurisdiction to clarify, enact law or bring amendments to a law with retrospective effect to remove the basis or defects in a judgement”.

Finance minister Pranab Mukherjee also tried to justify the tax change by saying that while retrospective amendments to tax laws are not ideal, he was authorised to make such an amendment, according to an Indian Express report .

“Every finance minister will have to protect the interests of the government from a revenue point of view. He will have to protect the revenue which is otherwise liable to be returned,” Mukherjee said. While the proposed tax change will be applicable on all deals since 1962, cases beyond six years would not be re-opened, he added.

Besides Vodafone, the proposed amendment in tax rules will 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.

Needless to say, for Vodafone too, the legal headaches may soon start all over again. It has already issued two statements urging the government to respect the Supreme Court’s verdict and exclude the company from the proposed tax change.

That, however, seems unlikely to happen.