Introduction:
The Indian Constitution states that no tax should be charged or collected except under the rule of the statute.[1] Any required accumulation of money by the State shall result in the imposition of a tax which is not permitted except by or within the jurisdiction of legislative provisions.
The issue of Vodafone was subject to controversy until 2012. Subsequently, a new growth, at some point, sparked a legal dispute between the Indian Income Tax Department on the one side and Vodafone on the other over the gigantic amount of Rs. 12,000 Crores, which created a ripple in many companies in India.
The Vodafone case, concerning the indirect selling of shares by upper-tier non-Indian companies of an Indian company, centred attention on the extraterritorial scope of India’s taxing power. Although the decision is essentially a win for taxpayers doing business in India, the case may be a harbinger of tax issues in India and elsewhere in other countries.
Vodafone Case: Brief Factual Analysis
Years before, in 2007, Vodafone International Holdings BV agreed to extend its foothold on the Indian cell phone market by acquiring Hutchison Essar.
Nevertheless, it agreed to take the roundabout; its subsidiary swapped cash for shares with a separate holding firm for Hutchison Essar, well away from the Cayman Islands. Having entered into an agreement entirely offshore, where the Indian tax authorities really have no say, Vodafone then went and made Zoozoo advertisements.
Hutchison (Hongkong) is a non-resident with no legal repercussions in India. Cayman Island (Mauritius) was a 100 % subsidiary of Hutchison (Hongkong). Hutchison Essar was an Indian company of which Cayman Island (Mauritius) owned 67 per cent of the shares and Essar owned just 33 per cent of the total.
Mauritius is known to be a Heaven State company, and Cayman Island was created specifically for this trade. Vodafone is a co. established in Nederland (UK), and is regarded as an international company in India.
The main game began when an assessing Officer (Indian Income Tax department) sent a notice to Vodafone on grounds of liability under section 271C (Total payment of Rs. 11000 Crore) on non-deduction of TDS under section 195 for the balance paid to Hutchison (HK).
Vodafone did not respond to the notice and filed a writ petition challenging the authority of the Income Tax Department to issue such notice before the High Court of Mumbai. The Honourable Mumbai High Court dismissed their demand at a fee. Vodafone then put the SLP before the Supreme Court regarding such denial.
Judgement
The Indian Supreme Court ruled that India has no power to levy withholding tax on Vodafone for the acquisition of Hutchinson Essar. When ruling for Vodafone, the Court ruled that Indian tax law clearly did not allow for the taxation of income from the selling of indirect interest to an Indian corporation. However, the Court did not conclude that the deal was a scam, partially because both Vodafone and Hutchinson’s administrative systems were in existence for a substantial amount of time before the deal happened and were not designed purely to affect the transfer. The Court noted that the system at question was bona fide and had a commercial nature and that it was not simply a way of depriving the Indian tax authority of revenue.
Commentators commended the Court for its consistency in Vodafone’s decision, provided that the Indian tax legislation does not expressly allow for the taxation of capital gains on the indirect transfer of stocks. In fact, the decision offers some measure of protection for non-Indian investors who may have fled India for fear of getting an unwanted tax bill from an intrusive Indian tax authority. Ultimately, the Court has not concentrated on the use of branches in tax-favoured jurisdictions when making its ruling, which may mean that the corporate scheme used by Vodafone would not be treated as an implicit tactic of tax avoidance by the Indian courts.
The lawsuit, on the other hand, shows the determination of the Indian taxation agency in collecting tax dollars, even though the jurisdiction may be uncertain. India could dispute related transactions that may generate tax revenue, possibly in the case of transactions affecting certain areas of Indian tax law that are not well specified.
Vodafone Aftermath
In the Vodafone decision, the SC acknowledged that the investment mechanisms had to be upheld and it had to be decided whether the investment was made for membership in the entity or if it was a pre-ordained deal aimed at avoiding taxation. In response to the above observations, the Government has introduced tax evasion measures in the form of the implementation of the General Anti-Avoidance regulations to determine whether a specific arrangement has been interpreted with a specific aim of avoiding the payment of taxes.
In addition, the Indian legislature is debating a bill that will require capital gains to be levied on the indirect sale of shares in an Indian corporation, where at least 50% of the transferor’s assets (directly or indirectly) consist of assets in India. Importantly, the legislation may be retroactive and can refer to activities that happened previous to the enactment of the law.
Conclusion
During the last few years, the trans-border takeover of Indian businesses has become a focal point of the tax authority. It is well known that if the transaction requires an instant conversion of the shares of any Indian Corporation, the alternative will trigger an appraisable capital benefit under the tax legislation. In any instance, there have been no situations which can be used for comparison in the past where the tax authorities have endeavoured to levy capital gains resulting from the sale of shares in a foreign holding firm to an Indian affiliate on the basis that such sale involves a circuitous transition of the underlying Indian properties and assets.
The case of Vodafone is an accomplishment in the Indian tax history that put to the fore the real intentions of the Parliament and the down-to-earth complexities in the implementation of CGT under the tax law. The purpose of the Parliament can only be expressed solely by the substance of the Income Tax Statute itself.
It is clear that the most suitable way to give effect to Parliament’s objective in the area of taxes would be to convey the policies and agreements unmistakably in the relevant act by providing a clear framework for the tax system. Again, the regulations on CGT should be extended to a larger degree and due its value in respect of International Taxation.
References:
- Vodafone International Holdings B.V. vs. Union of India &Ors, MANU SC 0051 2012.
- The Income Tax Act, 1961, No. 43, Acts of Parliament, 1961
- https://www.cbiz.com/
- https://economictimes.indiatimes.com/
[1] INDIA CONST. art. 265
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