India’s tax outreach justified

India has challenged in Singapore an international tribunal’s verdict in favour of British telecom giant Vodafone Group in a case involving a ₹20,000-crore demand from the India’s income-tax authorities.

The challenge is against the award by the Permanent Court of Arbitration at The Hague that held that the retrospective legislation was in breach of the guarantee of fair and equitable treatment under the Bilateral Investment Treaty.

The tribunal had also admonished the government and to cease and desist in future from such breaches of the international treaty.

Almost back-to-back, in another blow, New Delhi lost another arbitration case involving the retrospective tax amendment against Cairn Energy Plc, where the tribunal has asked the government to pay up over $1.2 billion in damages, plus interest and legal costs.

The Voda case

Vodafone had acquired a controlling stake in Hutchison Essar in 2007 through a purchase that took place overseas in a deal valued at $11.2 billion. India’s tax department said Vodafone should have withheld tax on the deal and issued a notice seeking ₹11,218 crore, later augmented by ₹7,900 crore in penalties.

Vodafone filed an appeal against the income-tax notice and won the case in the apex court. But, the government amended the Income Tax Act retrospectively in 2012, after which the company initiated arbitration proceedings. The government need not be apologetic about its resolve to stand firm.

A closer look

Let us delve a little deeper into the facts of the Vodafone case. The transfer by Hutchison of its 67 per cent stake in a Camay Island company to Vodafone was all about its telecom assets and operations in India. That being the case it was disingenuous to say that the transfer happening in a distant if not clandestine tax haven had nothing to do with India.

If a capital asset is located in India, its transfer gives rise to capital gains tax. Period. This applies as much to residents as to non-residents. After all the Cayman Island company was incorporated specifically to control the Indian operations of Hutch and, therefore, its shares represented the underlying value of the Indian assets So, there is indeed a level-playing field and foreigners are not discriminated against.

It is respectfully submitted that the Supreme Court did not go into the substance of the transaction and was swayed by the form. Its observation that the business connection rule of taxing foreign income cannot be extended to capital asset was fallacious because Cayman Island shares had no value independent of capital assets of Hutch in India.

The then Finance Minister Pranab Mukherjee, therefore, saw no option but to make a clarificatory retrospective amendment to overrule the Supreme Court verdict.

Not rational

It is easy for tax liberals to be sanctimonious in their advice to the Indian government. No sovereign government likes to let go of its just share of the tax revenues. Isn’t the US government justifiably angry with Ireland for providing tax sanctuary to US companies, notably Apple Computers that is US’ pride?

Hasn’t the OECD given its thumbs up to the rights of its member-nations to put their shovels into the profits of multinational companies leaving their footprints in multiple nations on the equitable ground that the nation where a profit is earned gives that nation the right to tax it? Which by the way vindicates the Indian government’s so-called Google tax, pilloried by our own commentariat more out of its desire to be seen as liberal rather than rational.

In any case, there has been a lingering doubt in knowledgeable quarters whether an income-tax matter can become a subject of arbitration. Certain matters like crimes are not arbitrable. Can a company thumb its nose at the Indian government by conveniently calling in the arbitrator?

The government must be applauded for digging in and not caving to international and domestic pressure.

The writer is a chartered accountant