Voda seeks Netherlands treaty to snub govt, will others follow?
JPEG - 26.4 kb
Investors fear the retrospective taxation of capital gains made over the past six years

First Post | Mar 30, 2012

Voda seeks Netherlands treaty to snub govt, will others follow?

by FP Staff

Fearing that the Indian government will use the new tax laws to trap it to pay back around Rs 12,00o crore as taxes, the world’s largest mobile operator, Vodafone, may just invoke a bilateral investment treaty between India and the Netherlands to avoid doing so.

While India’s planned tax changes under GAAR, which will come into effect from 1 April,could make the $2.3 billion tax claim valid under India law, “it would constitute a breach of the treaty, allowing it to claim back damages of an equal amount from the government as compensation,” the Economic Times reported today, citing a person familiar with the process.

The retrospective amendment proposed in the Finance Bill 2012 gives India power to retroactively tax the indirect transfer of assets, which was widely seen as targeting Vodafone’s $11 billion purchase of Hutchison Whampoa’s Indian assets.

Vodafone has already made it clear that these proposed changes in law contradict the Supreme Court verdict. The company has also said the proposed changes in the law contradict the Supreme Court and also raise important constitutional questions for India as well as widespread and profound concerns for international investors.

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, however, in January won this five-year legal battle in a Supreme Court ruling, which said authorities did not have jurisdiction to tax the company’s 2007 acquisition. 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.

The tax department has sought a review of the Supreme Court verdict. The review petition, however, was rejected by the court on 20 March 2012, which ruled that there was no tax liability in the Vodafone International Holdings-Hutchison Essar transaction.

However, Mukherjee has now sought to plug the legislative loophole that had legitimised this overseas transaction’s avoidance of tax in India. And he seeks to do so with retrospective effect going back to 1962. And once passed in Parliament, this legislation could potentially overturn a recent ruling by the Supreme Court that struck down the government’s tax claim against Vodafone.

Investors now fear the retrospective taxation of capital gains made over the past six years. Investors seemed to have a government assurance, and a Supreme Court judgment, which indicated that they would not be subject to any such taxation.

Not just Vodafone but other telecom majors like Russia’s Sistema and Norway’s Telenor have sought compensation for all investment, guarantees and damages if India failed to sort out issues related to their licence cancellation in the next six months.

source: First Post