The Supreme Court of India has begun hearing an appeal by UK-based cellco Vodafone Group over a US$2.5bn tax bill demanded by Indian authorities. The case, which is expected to run for a few months at least, is being watched carefully worldwide as the…
The Supreme Court of India has begun hearing an appeal by UK-based cellco Vodafone Group over a US$2.5bn tax bill demanded by Indian authorities.
The case, which is expected to run for a few months at least, is being watched carefully worldwide as the outcome could have an impact on foreign investments in the country.
In early September last year, the Bombay High Court ruled that authorities are allowed to levy a US$2.5bn capital gains tax bill from Vodafone International, a Dutch subsidiary of the British mobile operator, on its US$11.2bn purchase of Hutchison Essar in 2007. Hutchison Essar, a telecom JV, subsequently became Vodafone Essar.
The Indian Income Tax department argued that the deal not only involved the transfer of shares but also a transfer of rights such as management control, brands and rights to conduct business in India – pointing towards an ‘Indian nexus’, allowing the country to claim tax.
Vodafone rejected those arguments, saying that its subsidiaries in Mauritius and the Cayman Islands, where the stake changed hands, were fully functional companies. A Vodafone lawyer was quoted saying at the time that because India has a double taxation treaty with Mauritius, investments made from there into India are not subject to tax.
Questions were also asked about why the Dutch company, as a buyer, should be liable to a tax since it made no gain.
Vodafone CEO Vittorio Colao reportedly complained in late September that the tax bill sent a negative message about the country to foreign investors who create jobs and deploy assets in India. He was later quoted saying that he would need a positive outcome to the tax case and a stable regulatory environment to continue investing in the country.
Some experts in the industry fear that if the Supreme Court decides to go ahead with the tax bill, other foreign firms might also be deterred from investing in the country. But others argue that, ultimately, deals will not stop as India remains a very attractive market for investors.
With 14 mobile operators in India, the sector is considered overcrowded. But local tax regulations have often been seen as the main hurdle to M&A since buyers have no clarity as to how regulations will change.
The upcoming New Telecom Policy 2011, scheduled for October, is reportedly looking to tackle some of these issues in the wake of the 2G scam scandal.
The judgment on the Vodafone case could be expected by the end of the year, according to reports.
