A missed opportunity

Written by Indu Bhan | Indu Bhan | Updated: Feb 14 2014, 06:03am hrs
The failed conciliatory talks between telecom major Vodafone and the Indian government to resolve a seven-year-old $2 billion tax dispute will, no doubt, occupy considerable mind-space among policy and regulatory watchers. While the government will face accusations of changeable regulations and rough treatment to foreign investors, Vodafone must understand that it needs to follow law of the land.

Though it has lapsed now, the settlement process of the Vodafone case, when it was announced, would have sent a strong and positive signal that India is committed to finding a solution to the impasse.

Now, the finance ministry plans to seek the Cabinet's approval to withdraw from talks with Vodafone Group Plc, after the British company pushed for the inclusion of a separate case on transfer pricinginvolving the issue of shares in its Pune-based BPO arm, Vodafone India Services, to Vodafone Teleservices Mauritius for Rs 246.38 crore in FY08in the talks. Revenue authorities feel that the transaction was undervalued and have asked Vodafone to pay R3,700 crore towards taxesa claim that was halted by the sectoral tribunal in December.

The government could now raise

a fresh demand for the pending

tax amount, along with accrued

interest and penalty, from Vodafone, which entered India in 2007 by acquiring Hutchison Whampoa's mobile phone assets.

While the basic tax demand for the 2007-acquisition is R7,990 crore, the outstanding dues, including a penalty of a similar amount and accrued interest, run into R20,000 crore.

Several other MNCs watching the developments keenly include Shell India, which is fighting a tax demand of R5,500 crore on charges of underpricing an intra-group share transfer, and mobile major Nokia, which is facing a R21,000 crore tax demand for violating capital gains regulation in India.

Although both the finance ministry and Vodafone had expressed keenness to settle amicably the long-pending capital gains tax dispute, the company probably developed cold feet and added what superficially seems an unacceptable demandclubbing of the transfer pricing caseleading to the collapse of the talks.

The government's approach towards the British firm has been under intense scrutiny for sometime now with experts saying that there seemed to be much more than what met the eye. The government had gone out of its way to break the deadlock and lay down the path for any negotiations, something that was unheard of till now. But Vodafone seems to have now lost the opportunity for an amicable settlement.

After a retrospective amendment to the tax framework was adopted, it was perhaps within the government's rights to exercise its statutory powers to recover money and the law was binding on all the entities, including Vodafone. However, conciliation in a tax dispute would have been a futile exercise as settlement of tax disputes through conciliation, under Part III of the Arbitration and Conciliation Act 1996, was not possible. To enable conciliation, the government was required to amend both the I-T Act and the 1996 Conciliation Act. Doing this would have been a complex and time-consuming affair.

Besides, non-binding conciliation is a long-drawn process and subject to executive interference..

If India wanted to accord fair and equitable treatment to investors, then it should have rolled back the retrospective amendment of the Income Tax Act in 2012a change in the law made to make Vodafone pay up.

After withdrawal of informal talks and the raising of the controversial tax demand over Vodafone's 2007 purchase of Hutchison Whampoa's local assets, the former has the option to challenge the retrospective amendment in the court, besides invoking the Bilateral Investment Treaty (BIT) between India and Netherlands for international arbitration. Any award under BIT is binding and no court in the country can interfere with it.

As it stands today, the dispute is sure to drag for long. A much-needed, speedily negotiated solution to the disputewhich will calm the ruffled global investorsseems to take sometime. The new government after general elections will have a complex issue at hand in the Vodafone tax dispute. Probably, the company too would have to wait for the new government to take the matter forward.