Vodafone case casts shadow on investment climate
Given Vodafone’s business interests in India—it is spending upwards of R10,000 crore just to buy out its partners—it wasn’t surprising that the company chose to get into conciliation with the government on the R20,000 crore tax demand on it. Indeed, after the government slapped the tax demand on Vodafone following the retrospective tax amendment which undid the Supreme Court verdict in its favour, Vodafone had the option of taking India to international arbitration courts. What is unfortunate about the finance ministry now wanting to annul the conciliation process is that the reason appears more bureaucratic than strategic.
After slapping a tax on Vodafone Plc for not deducting a tax at source while buying out Hutch’s shares in Vodafone India, the taxman also levied a R3,700 crore tax on Vodafone India on the transfer of the options on its shares held by Analjit Singh and Asim Ghosh. While the Supreme Court had ruled in favour of Vodafone in this matter also, Vodafone Plc insisted that the conciliation deal with the tax on both Vodafone Plc as well as Vodafone India. The taxman, however, argued that the Vodafone India matter was not raised by Vodafone Plc initially and that, in any case, this was the subject of appeal in the tax tribunal. But given both cases arise from the same transaction, surely the taxman should have clubbed both taxes in the conciliation process?
This would also have made sense from a strategic point of view. After then finance minister Pranab Mukherjee brought in the retrospective amendment, India faced a lot of flak from global investors. That’s when the new finance minister’s advisor Parathasarathi Shome’s report came out recommending scrapping of the retrospective amendment, and that’s when the finance minister started speaking of a non-adversarial tax regime. Which is why it made sense to try and settle the matter with Vodafone, more so given the taxman’s ability to make its demands stick is so poor—the taxman loses around 60% of the cases it files. Settling the Vodafone case would also make it possible to get the retrospective amendment clause off the statute books. As things stand today, with no change in the statute, foreign investors are going to continue to remain wary of investing in India.