The recent income-tax notice sent to Vodafone International Holdings BV (in the Netherlands) for Rs 14,200 crore, including a penalty, and threatening the seizure of their assets, has created fresh controversy and raised the bogey of scaring away investors. Revenue secretary Hasmukh Adhia tweeted that the notice is a routine exercise wherein collection notices are sent to all those whose dues are not stayed by any court, but this does not cut much ice with the people concerned. Even the seizure bit is part of the pedantic exercise until the actual action happens. It does seem illogical for the I-T Department to send a notice, though legally correct, when the Vodafone case challenging the tax notice is pending arbitration in London. The I-T Department’s argument that the arbitration case is going nowhere is no ground to send a notice. The arbitration delay is due to a judge from the Indian side suddenly recusing himself from the case and another resigning, making it necessary to find new judges.
The Vodafone case pertains to the acquisition of Hong Kong-based Hutchison Wampoa’s 67 per cent stake in its telecom JV with Essar (Hutchison Essar) in India for $11.1 billion. The deal that was structured involving several Vodafone companies in different countries, was executed in the tax haven of Cayman Islands. Much later, during the tenure of the Manmohan Singh government, the I-T department slapped a basic capital gains tax demand of Rs 7,990 crore on the transaction. Though the Supreme Court struck down this tax demand in 2012, saying that Vodafone was not liable to pay tax on the deal, the Manmohan Singh government amended the law to retrospectively apply the tax on such transactions. This amended law still remains on the statute books and until it is scrapped there will always be an element of uncertainty. After the Narendra Modi government came to power in May 2014, both the Prime Minister and finance minister Arun Jaitley have been declaring repeatedly that they would not indulge in “tax terrorism” and would not impose retrospective taxes.
Whilst their intentions are not in doubt, more clarity is needed on the retrospective taxation cases that are already in court. Mr Jaitley had said that cases already in existence would run their course.
But whilst foreign direct investment has been pouring in and Mr Modi has said that 2015 saw the largest ever inflow of FDI, the fact remains that every time the tax sleuths issue a notice to Vodafone, the ghost of tax terrorism returns. India, with its huge middle class and untapped regions, remains the most attractive destination for foreign investors. However, it would be in tune with the government’s various reforms if this retrospective taxation issue can be clarified unambiguously once and for all.
