Vodafone case will help others like Essar; Nod to HDFC Bank R10,000-cr foreign equity
The Modi government on Wednesday gave a major leg up to the reforms process by deciding not to appeal against the judgment of the Bombay High Court in the transfer pricing cases relating to global firms Vodafone and Shell. The decision by the Union Cabinet that any tax relief given by courts or tribunals in favour of the taxpayer for sale of allegedly under-priced shares to their foreign parents would not be challenged by the government would go a long way in soothing investor confidence that had got ruffled with what came to be known as tax terror.
Other major decisions like the one to go ahead with the share sale (between 5% and 10%) of Coal India despite the threat by trade unions to go on strike and clearing HDFC Bank’s proposal to raise overseas funds of R10,000 crore, which was pending for over a year; would further add to the investor-friendly image of the government.
The Vodafone Group was quick to welcome the move by issuing a statement that said, “We welcome the Indian government’s decision not to appeal the Bombay High Court ruling. Stability and predictability in tax matters are important for long-term investors such as Vodafone.”
Prime Minister Narendra Modi had recently in his address to a grouping of Indian and US CEOs promised a competitive and predictable tax regime, while finance minister Arun Jaitley has been saying that controversial tax demands have not brought in even a single rupee as revenue but lot of bad name to the country.
In the Vodafone and Shell cases, the Bombay HC ruled in favour of the companies because the funds raised by the Indian subsidiaries by issuing shares to their parent firms was seen as capital receipts and not income. The government’s decision not to go in appeal against the judgment in the Supreme Court was based on the advice of chief commissioner of international taxation, chairperson of the Central Board of Direct Taxes and the attorney general.
Revenue department officials told FE that the Cabinet’s decision sets a principle that would be applied in all relevant cases and assessment years.
The Bombay High Court had quashed the taxman’s addition to Vodafone India Services’ income to the tune of R4,831 crore for two years — 2008-09 and 2009-10 — and in a similar case, addition of R17,920 crore to Shell India Services’ taxable income for 2007-08 and 2008-09 (see table).
Briefing reporters, telecom minister Ravi Shankar Prasad said the government wants to convey a clear and positive message to investors globally that it would be “fair, transparent and within the four corners of law”. The minister also said that where the tax liability is clear and unambiguous, it will be charged, and where it is overstretched and lacks legal authority, it will not be pursued.
The Cabinet Committee on Economic Affairs (CCEA) meanwhile approved the long-pending plea of HDFC Bank to raise overseas funds worth Rs 10,000 crore to strengthen its capital base. The official statement said the approval is subject to aggregate foreign shareholding in the bank not exceeding the permitted 74% of the post-issue paid-up capital.
The approval would result in foreign investment of Rs 10,000 crore in the country, the statement said, adding that the bank plans to issue equity shares worth Rs 10,000 crore to NRIs/FIIs/FPIs.
In December last year, the Foreign Investment Promotion Board had cleared the same proposal, but it required Cabinet clearance as it involved an investment in excess of Rs 1,200 crore.
The bank had in late 2013 sought FIPB approval for its proposal, but it was denied as the industry and finance ministries ruled parent HDFC’s 22.56% stake was FDI. This meant the total foreign holding in the bank was over 67.55%, higher than the limit of 49% in private banks through the automatic route. HDFC Bank then moved a revised proposal before FIPB seeking to hike its foreign holding ceiling to 74%.
The government’s decision to sell up to 10% stake in Coal India through an offer for sale at current market prices could fetch it around Rs 24,000 crore.
The Cabinet also approved the reserve price for 3G auctions at Rs 3,705 crore per megahertz.