Vodafone vortex

Mohan R Lavi | Updated on March 09, 2018 Published on February 22, 2016


The Budget’s a good time to bury the issue

Like some soap operas on television, the Vodafone tax affair never seems to end. The original acquisition transaction took place on February 11, 2007. Soon, the tax department wanted their pound of flesh. The Bombay High Court concurred with the tax department but the Supreme Court did not.

The government then used its brahmastra — it amended the Income Tax Act retrospectively bringing such transactions to tax. Vodafone managed to avoid this too — it sought succour in the international arbitration tribunal. When everyone concerned was hoping that the decision of the tribunal would settle the matter once and for all, the tax department springs a surprise.

Latest tax reminder

Just a few days ago, the tax department sent a notice to Vodafone threatening to seize assets if the company did not pay up $2.1 billion in taxes. Any overdue amounts, even from overseas companies, may be recovered from any assets of the non-resident which are, or may at any time come, within India.

Vodafone reacted strongly by confirming receiving the tax reminder. It reiterated that this dispute is currently the subject of international arbitration and that the Indian government stated in 2014 that all existing tax disputes including that of Vodafone would be resolved through existing judicial process. It concluded that there is a complete disconnect between the government and the tax department.

Anyone who owes a decent amount of money to the tax department would agree that February and March are months when the tax department is overly aggressive on collecting old dues including ones in dispute. One can expect the department to be even more aggressive this year due to the shortage in direct tax collections to the tune of around ₹40,000 crore. One way to look at the notice to Vodafone is that it is just one of many that was system-generated and despatched. Vodafone must be hoping that this is what has happened.

The disconnect

The Vodafone dispute is no longer a tax dispute involving a large sum of money — only the tax department seems to view it that way. The outcome of the case seems to be an indicator of the past, present and future of tax policy in India.

Everyone concerned with cross border taxation is keen to know whether the tax environment in India is going to be one of stability or knee-jerk notices.

Will the tax department wait for the arbitration tribunal judgement or seize assets? Will Vodafone just get fed up of the back and forth and pay up? The technicalities of whether the transaction is subject to tax as per laws prevailing at that time can be disputed ad nauseam.

In the entire saga, Vodafone has always maintained that the transaction is not taxable and got the nod of the Apex Court.

The tax department reacted needlessly with the retrospective amendment. It is only appropriate that they drop the case, forget it and shake hands with Vodafone. They may lose ₹14,200 crore of tax but a number can’t be put to the quantum of intangible benefits it would bring to India.

February 29, 2016 presents a great opportunity for many fires to be stoked with one sentence by the Finance Minister during his Budget speech. “The government has decided (not “is committed”) to drop all tax cases involving retrospective amendments including Vodafone.”

The writer is a chartered accountant

Published on February 22, 2016
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