|To Vodafone, via Hutch|
|Friday, 27 April 2012 00:11|
Deal for overseas assets, tax letters about Indian leg!
If it wasn’t bad enough that the government should bring in a retrospective tax amendment after losing its case to Vodafone in the Supreme Court, the recent spate of press briefings by finance ministry officials—followed by Vodafone refuting the points made—has reduced the matter to a slanging match. If the finance ministry plans to tax Vodafone using the retrospective amendment, why not issue a new tax demand first, and then let it be challenged in the courts, either in India or in the international arbitration process that Vodafone has threatened? Indeed, we have an interview by the finance secretary saying both Vodafone and Hutchison had been advised by the taxman that their transaction would attract taxes in India. After saying this, the finance secretary has said Vodafone may even have used this potential tax payment to pay a lower amount to Hutch.
Turns out, when you look at the letters exchanged on this—all are part of the court record—the taxman didn’t quite cover himself in glory right from day one. Though the finance secretary is on record saying Vodafone had been advised about the need to pay tax, the only letter to Vodafone has been addressed to “M/s Vodafone, UK, c/o M/s Huchison Max … Mumbai”—even a simple Google search would have provided details of Vodafone’s headquarters. While this letter advises Vodafone it will have to pay a withholding tax on the transaction, the letter was returned by Hutchison Essar saying it did not represent Vodafone and nor was it authorised to receive letters on Vodafone behalf! The more substantive issue, of course, is that while the letters from the taxman to Hutchison Essar—one of which was shared with Vodafone by Hutchison Essar—were all based on the assumption that a transaction was taking place in the shares of the Indian firm Hutchison Essar, the company kept replying that since no transaction was taking place in its shares, no tax was applicable including, therefore, a withholding tax. The way the transaction was structured, Hutchison Essar told the taxman, Vodafone bought shares of a company called CGP Investments located in the Cayman Islands and CGP, in turn, owned 42.34% of the Indian firm Hutchison Essar.
Even though it is true a tax notice doesn’t necessarily mean the taxman is right, after getting an explanation from Hutchison Essar, the taxman never ever said he was reinterpreting the law to mean that, if an underlying asset is based in India, the transaction would be taxable. And it could not do that since changing the law is the prerogative of Parliament, not the taxman. In which case, it is difficult to see how the finance ministry can say Vodafone had been duly warned. In any case, after the Supreme Court verdict, even if it had been, this is only of academic interest.