Vodafone cleared in India tax evasion case

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The Supreme Court of India cleared the air by setting aside the Mumbai High Court ruling that asked Vodafone International Holdings to cough up $4.4 billionin income tax on acquisition of interests in Hutchinson-Essar Limited in 2007. The Supreme Court also asked the Income Tax department to return $11 billion deposited by Vodafone International Holdings within two months along with 4% interest.

Indian income tax sources said they had submitted eight spiral-bound volumes with a concise timeline as ready reckoner to the Supreme Court. “The bench has given the order after going through all of these documents. The core committee will go through the order of the apex court and suggest lessons to be drawn from the judgment,” a three-judge bench headed by the Chief Justice of India said in its ruling.

According to reliable sources the tax department may not go for a review petition. Central Board of Direct Taxes (CBDT) Chairman MC Joshi told Press Trust of India (PTI) that they would study the whole judgment and decide further action.

However, under the proposed Direct Tax Code (DTC) if any amendments are made, they would not have any retrospective effect. Chapter XI of the draft DTC Bill, which is under consideration of a Parliamentary Standing Committee, provides for general anti-avoidance rules.

CASE HISTORY

The case began with Vodafone’s $11 billion acquisition of Indian assets of China’s Hutchison Telecommunications in 2007. In May 2007, Vodafone’s Dutch subsidiary acquired 67% stake in CGP Investments Ltd, a Cayman Islands registered company that held the assets of Hutchison. Vodafone declined to pay tax on assets and stated that it did not owe any tax as the assets were held by a firm based in the Cayman Islands.

The Income Tax department, however, demanded Rs112 billion (currently worth $2.2 billion) on the basis of the assets. The Indian government subsequently sought penalties of up to 100% of the original bill.

Vodafone India has over 850 million subscribers in the country. Last year it generated arevenue of $3.86 billion. The ruling will now speed up Vodafones IPO issue that was under wraps for a while. Developing markets such as India are important to the company and have accounted for 9% of the firm’s total revenues during the period.

INDUSTRY RESPONSE

The judgement relieved pressure on other foreign companies facing similar tax investigations in India. The ruling was appreciated by India’s corporate sector which expects it will give a potential boost to mergers and acquisitions. At least eight other companies, including AT&T, SAB Miller, GE, Cadbury, Sanofi and Vedanta,are facing similar cases.

However, advocates of higher corporate taxation were disappointed with the judgement.

John Christensen, Director of the Tax Justice Network and author of a book on offshore tax havens, said: “This is deeply harmful. It will simply encourage all other companies around the world to use offshore structures to avoid tax.”

But many analysts say the legal precedent may be short-lived as the government plans to implement a Direct Tax Code which could contain provisions that would make similar transactions liable to Indian taxes.

Sources: BBC, Economic times, Reuters

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