Proposed tax bill could end decades-long tax dispute with Vodafone

6 Aug 2021

The Indian government has introduced a bill to parliament that could end the state’s long-standing tax dispute with Vodafone Idea (Vi) over Vodafone Group’s USD11.1 billion acquisition of a majority stake in mobile provider Hutchison Essar in 2007.

As the parties involved were registered outside of India and the transaction was completed overseas, no tax was paid to the Indian government on the transfer of the shares. However, the Indian government argued that Vodafone was liable to pay capital gains tax to it because the transferred assets were based in India. The subsequent litigation on the matter eventually led to the Supreme Court siding with Vodafone in January 2012, noting that there was there was no rule on the books to support the government’s stance and, as such, Vodafone had no tax liability to India on the deal. In the wake of the decision in May that year the government introduced new legislation that clarified that assets or capital assets would be considered to be situated in India if they derive their value substantially from assets located in India. In the case of the Hutchison deal, for example, as the shares derived their value from the Indian mobile business of Hutchison Essar, the new rules deemed that those shares are deemed to be situated in India, and their sale would be taxable in India. Crucially, the 2012 amendment was applied retrospectively, enabling the government to reimpose the tax demand on Vodafone. The group sought international arbitration on the case, and in September 2020 a tribunal at The Hague backed Vodafone and ordered New Delhi to pay the firm USD1.2 billion in damages. The Indian government rejected the ruling and in February 2021 filed an appeal with the Singapore High Court.

The proposed legislation – The Taxation Laws (Amendment) Bill, 2021 – would reverse the controversial retrospective element of the 2012 amendment, so that transactions completed prior to 28 May 2012 would not be considered taxable in India. Importantly, though, demands that have already been raised shall be nullified if certain conditions are met, and any amounts already submitted will be refunded – albeit with no interest paid on the amount. The conditions specified are as follows: that the taxpayer withdraws any petitions before the High Court or Supreme Court against the order in question; that any claims for arbitration, conciliation or mediation in India or overseas are withdrawn; and that the taxpayer waives their right to pursue any claim in relation to the order. In the case of Vodafone, it was not made clear if the government would continue to pursue its claim at the Singaporean court if the group does not comply with the conditions stated above.

Whist the bill – if passed – would do little to directly provide much-needed financial assistance to the ailing cellco, it may go some way towards repairing the nation’s reputation and encourage investors to return to the market.

India, Vi (Vodafone Idea Limited, VIL), Vodafone Group