Do you remember the good old days when there was an iconic Vodafone ad with the pug? You and I in this beautiful world...brings back all the nostalgia, doesn’t it? They surely took the internet by storm with this ad still stuck in the minds of the Millenials!
The Vodafone Idea we all know today came to India in 2007 and replaced the Hutch brand with the Vodafone-Hutch deal of whopping 86000 crores!
Interestingly the migration from Hutch to Vodafone was one the fastest brand transitions in the history of Vodafone Group with over 400000 multi-brand outlets, over 350 Vodafone stores, over 35 mobile stores rebranded in two months! 🤯
So far so good! What exactly was the problem? Apparently, Vodafone’s entry into India wasn’t as smooth as it looked like. Soon after the merger Vodafone was asked to pay $2.1 billion in taxes to India? But why?
Let’s understand the famous Vodafone Tax Tussle
Back in 2007, a Hong Kong based Hutchison Telecommunication Ltd (also known as Hutch) sold its stake in Hutchison Essar Limited (HEL), an Indian co. to Vodafone International Holdings, a Netherlands entity. Hutchison had Telecom Operations spread over in Indonesia, India & Sri Lanka.
But Vodafone did not buy Hutchison Essar Limited directly. It first bought CGP Investment Holding which was situated in the Cayman Islands. And this CGP Investment owned a 67% stake in Essar Group popularly known as Hutch in India.
So that is how Hutch became Vodafone in India!
Now we know that whenever property is sold in India one has to give Central Gains Tax to the govt and the party buying has to pay Tax Deduction at Source. And it is a common practice for companies to open subsidiaries in Tax Haven Countries to save such taxes.
And apparently this is what the parties did in this case. Cayman Islands is a place where there is no corporate tax whatsoever which is why it is also called a tax haven. So the entity bought by Vodafone was not situated in India but it was situated in Cayman Islands.
So with this smart move ultimately an Indian company held by a foreign company was sold to another foreign company in a foreign land. Geddit!?
Now the question comes up whether it was just a matter of smart Tax Planning or one that of Tax Avoidance? Hmm. Interesting!
Did you know there is a very thin line of difference between Tax Avoidance & Tax Planning? Tax planning is done to reduce one’s tax liability using existing provisions of law. On the other hand, tax avoidance is done to dodge your tax payments by taking advantage of loopholes in the law.
Now of course Income Tax authorities had to intervene as there was sale of India Assets. The Indian revenue authorities considered that acquisition of stake in HEL by Vodafone was liable for tax deduction at source under Section 195 of the Income Tax Act, 1961.
Indian government be like- Bhaisaab mera Tax kahan hai!
So, in 2007 itself a show cause notice was given to Vodafone by the Income Tax Department to clarify the reason why tax should not be paid in India as the transfer of shares in CGP had an impact of aberrant or indirect transfer of assets in India.
The Indian government mainly wanted capital gain arising from sale of share capital of CGP on the ground that it had underlying Indian Assets.
But Vodafone refused to pay taxes since it claimed that this transaction was between a dutch company and a Cayman Island based company, so why in the world should we pay taxes in India?
And next what happened was Vodafone filed a petition in the Bombay High Court against this and challenged the jurisdiction of Indian Revenue Authorities.
What did the High Court say?
They said that all the money that the Hutchison Essar made was because of using Indian Assets, so they ought to pay taxes in India. Vodafone had to pay a total tax of around Rs. 11218 crore but of course it refused to accept the decision and knocked on the doors of the apex court of India.
Supreme Court’s Decision
Now cut to 2012, the Apex Court held that it was not a case of Tax Avoidance and discharged Vodafone of its Tax Liability since the sale of share in question did not amount to transfer of capital asset within the meaning of Section 2(14) of the Income Tax Act. The SC also said that the subject matter of the transaction was the transfer of CGP Investment (Holdings) Ltd, which was a company incorporated in the Cayman Islands and Indian Tax Authorities had no Territorial tax jurisdiction over it.
Now the Government of India(quite expectedly) filed a review petition against the judgment and this was also dismissed by the Supreme Court.
A Bizarre move by the Government
The government could not stomach this judgment and soon it came up with a retrospective amendment in the Income Tax Act, 1961. Retrospective.. Err what does that even mean? Basically, the retrospective taxation allows a country to pass a rule on taxing certain products/deals and charge companies from a time behind the date on which the law is passed. It is done with an aim to remove any sort of flaw in any law so that companies don't take advantage of the loopholes present.
Now the government retrospectively amended the income tax law to tax offshore deals involving the transfer of Indian assets and therefore Vodafone was forced to pay up the taxes.
But how did the government justify it? It said that the amendment was only a clarification to remove ambiguity and provide certainty.
Now obviously Vodafone wasn’t happy with this retrospective legislation, and in 2014 it invoked arbitration in the Permanent Court of Arbitration at Hague. Tribunal held that a retrospective amendment to Indian Tax laws was in violation of the India & Netherlands bilateral treaty. The tribunal also asked India to reimburse legal costs.
Then in 2020, the government challenged the arbitration award before a Singapore Court to set aside the award on jurisdictional grounds.
In August 2021, the government passed the Taxation Laws Amendment Act, 2021 to repeal the retrospective legislation on indirect transfer tax.
It also issued a fresh set of rules to facilitate settlement of retrospective tax dispute with Vodafone and it has promised to refund any tax collected using such law but without any interest and subject to Vodafone agreeing to withdraw all pending legal proceedings.
The government finally acknowledged that the retrospective taxability of indirect transfer laws resulted in a negative investment outlook.
What are your views in this case? Also, do you think MNCs have been using Tax Havens to dodge out taxes?