The landmark case surrounding Vodafone’s tax dealings in India may have set a precedent as far as international investment is concerned
The Indian Supreme Court has put an end to the country’s tax office’s pursuit of UK telephone operator Vodafone for tax arrears of £1.3bn.
The case related to the company’s acquisition of Hutchison Essar for £7bn. The move is widely seen to provide reassurance to foreign investors at a time when the country’s economy is slowing down.
The court’s ruling put an end to a long-running dispute between Vodafone and the Indian tax office over the former’s liability for capital gains tax on one of the largest corporate takeovers in the country’s history. The deal was concluded five years ago by making use of offshore companies.
Vodafone has made investments totaling £12bn in India. The company argued that the seller usually pays capital gains tax, not the buyer, and that the government applied the taxes retrospectively.
Following his decision, Justice SH Kapadia went on to say that: “Certainty and stability form the basic foundation of any fiscal system. Investors should know where they stand. It also helps the tax administration in enforcing the provisions of the taxing laws.”
Judge KS Radhakrishnan held that forcing the tax on Vodafone would amount to punishing them for making an investment in the Indian economy.
After the ruling, Vodafone’s share price immediately increased by three percent in early trading. The decision came as a surprise to foreign investors who had recently been witness to concerted efforts by the Indian tax office to extract the maximum possible taxes from international companies with Indian assets.
SABMiller, a brewery, was last year landed with a tax bill of £25.6m after it bought Foster’s operations in India in 2006. The authorities are also busy clamping down on French pharmaceutical group Sanofi, after purchasing an Indian vaccine company.
The Vodafone decision could have serious repercussions for the tax office in these cases.
CEO of Vodafone, Vittorio Colao, said: “We are a committed long-term investor in India and we have made clear all along that we have faith in the Indian judicial system.”
He added that the company welcomed the decision by the Supreme Court. This, he said, underpins their confidence in the country. He went on to say that Vodafone would now proceed to grow its Indian business, including investing significant amounts in 3G networks and in the rural areas. He added that this would benefit Indian consumers.
The ruling also brings Vodafone one-step closer to its goal of getting listed on the Bombay stock exchange. The company plans a listing in 2013, which analysts believe would raise capital to the amount of £3.4bn.
Bernstein Research’s Robin Bienenstock said that this would not only generate cash, but it would also put the company partly in Indian hands, which might cause regulators to treat it a little more kindly in future.
The Vodafone issue was widely seen as a test case for dealing with foreign investors in the subcontinent and it could also set the tone for countries such as China.