The Vodafone saga refuses to end. The latest is that Vodafone has served a 'notice of dispute' against the Government of India, and is considering launching international investment arbitration proceedings under the India-Netherlands Bilateral Investment Treaty (BIT) signed in 1995 over a tax proposal under Finance Bill 2012 that could reverse a key $ 2.2 billion victory Vodafone won in January this year. Basic facts of the case are simple. When the Government sold telecommunication licenses from 1990s onwards, few Indian business houses had the money to buy licenses or appetite to hold them until they become profitable. So the Government allowed them to bring foreign partners. Essar brought in as foreign partner Hutchinson Whampoa, the company of Sir Ka-shing Li one of the richest persons in the world. Hutchinson sold its stake to a Dutch subsidiary of Vodafone in 2007. The transaction was made in Cayman Island. Sir Li made good profits, but he was in Hong Kong, beyond the reach of Government of India. Indian tax authorities- the CBDT- sent a notice to Vodafone that it had bought an Indian business and asked it to shell out $2.5 billion tax. Vodafone went to court against the notice. The court held that the transaction took place offshore and is not taxable. The Government got further setback when the court rejected its plea for review. The Government had to subsequently refund with interest an amount of ` 2,500 crore deposited by Vodafone in November 2010.
The Government in the Finance Bill, 2012 proposed an amendment in tax laws with retrospective effect dating back to 1962 that will empower it to tax all transactions entered in and out of India if they resulted in direct or indirect transfer of assets located in India.
Despite above protests, the Government of India has remained firm arguing that the proposed amendment is not changing the law or introducing any new stipulation, it is only making it clear that the Income Tax Act always intended to tax overseas transactions leading to change in control of assets in India (such as Vodafone's acquisition of Hutch Essar in 2007). It is pertinent to mark that the Supreme Court in its ruling had rejected Government's tax claim on the ground that the legal provision was not clear enough when it came to indirect transfers such as when a foreign holding company that owns assets in India sold, effectively transferring control of the assets in India. Many who share Government's approach, view court's ruling as holding that the Indian Income Tax Act obliged tax authorities to see the form of the transaction and not look beyond. At the level of form, when Vodafone acquired Hutch Essar, a foreign company bought a majority of stake in another foreign company. So, the court's determination is that why should India have any tax claim in the matter? Objecting to such a view of the court's holding, it is said by advocates of Government's approach that if we look beyond the form, at the substance, the acquired company was worth buying, and selling only because it controlled a major player, Hutch Essar, in the world's most dynamic telecom market, India. They say that since Hutch Essar's value derived from India's dynamic market, created by the Government's policies, in telecom and otherwise, India has every right to tax the transaction that traded its value. They argue that as the Government's policy allocating cheap spectrum to operator was the cornerstone of telecom's fast growth, if a share of the value generated through a low-cost, high-volume business goes to any government it should be to India's and to maintain that no tax is payable to any government for that transaction is totally unsound. Echoing above and reacting to other changes made by its opponents, Mr. Pranab Mukherjee India's Finance Minister told Parliament, "We are making three points quite clear - that India is not a 'no tax' or 'low tax' or even a 'tax haven'. India is a country where tax laws are that if you pay tax in one country, you need not pay tax in the other country of your business operation which is covered by the DTAA. But it cannot be a case that you pay no tax at all." Justifying retroactive nature of the amendment, he argued that retrospective changes to the law were the norm in India and 'the practice to amend law retrospectively is followed everywhere in the world including UK, Australia, China and others. The UK as recently as in 2012 has amended its income-tax laws retrospectively. China too has amended tax laws as recently as in 2009 to tax Vodafone like off shore transfers retrospectively.'
Countering the argument that the proposal is 'clarifactory' they say: 'Were India to do so prospectively investors would be able to plan their affairs for future with confidence. Seen in this light especially that the proposal amounts to changing retrospectively going as back as 1962, tax-laws that are already settled, applied and where finality stands declared in the hands of the highest Court, many are doubting whether the amendment would stand the test of constitutional validity and are describing Indian approach full of conundrums and contradictory to emerging trends in International tax-jurisprudence. In his attempt to allay fears of trade bodies Mr. Mukherjee observed: "We are only explaining our stand in Vodafone case... Intentions of the Legislature will have to be clarified from when the legislation came into force.....but it did not mean that all tax cases will be re-opened.... As per law authorities could not re-open any case beyond six years and that law will prevail." Many do not seem to have bought this explanation.
Frustrated with these developments, Vodafone has served, as mentioned earlier, a 'notice of dispute' against the Indian Government. In a regulatory filing to the London Stock Exchange, Vodafone has asked the Indian Government to abandon or suitably amend the retrospective aspects of the proposed legislation as Vodafone would prefer to reach an amicable solution to this matter. Experts believe that Vodafone may invoke 'unjust expropriation' clause in the treaty against the Indian Government, contending that such an amendment will amount to expropriation of its investment.
Foregoing context has put to test India's acumen in meeting both its interest in respecting international obligations and protecting its own interests simultaneously, especially interest in protecting its revenues, attracting large investments and implementing economic reforms speedily, keeping intact its reputation as a strong legal system in which rule of law, independence of Judiciary, respect for courts' rulings and considerations of due process and proceeding fair treatment are paramount.
No denial that amending laws retrospectively is not uncommon across the world, it does cause uncertainty that is best avoided. India's strong legal system is an important factor that makes it an attractive foreign investment destination. This would need a pro-active, insightful and perceptive approach to policy-making, law-making and legal reforms and that is the real challenge that Jurisprudence of Vodafone's case has thrown for us to ponder and act upon.