The Telegraph
Friday , July 6 , 2012
Since 1st March, 1999
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PMO stance key to Voda tax course

New Delhi, July 5: Finance ministry officials are still waiting for directions from the Prime Minister’s Office on the tax demand to Vodafone. The officials are ready to serve a notice to Vodafone as they feel letting the UK-based telecom giant off the hook could set a precedence.

The ministry has another option: allow Vodafone to challenge the retrospective tax charge in international arbitration. But this is being viewed as one fraught with the danger of attracting adverse comments from the Opposition parties.

The Union budget’s finance bill this year had a retrospective amendment, which clarified that the income tax laws of 1962 were meant to tax any deal where the asset underlying the sale or purchase is in India even if the deal is struck elsewhere.

A Supreme Court judgment in January had prompted the amendment. The apex court had ruled that the government had no right to tax the share sale by a Hong Kong-registered shell firm owned by Hutchison to Vodafone in the tax haven of the Cayman Islands. The government was asked to return Rs 11,000 crore in presumptive taxes, with interest.

The government’s point was that if the deal had been done in India or in the UK, where it was based, Vodafone would have been liable to deduct tax at source.

By letting Vodafone go scot-free, the government would be treating it differently from other companies which chose not to use shell firms and tax havens to structure their deals.

Top officials pointed out that the judgment could well have led to the reopening of a large number of cases since 1998 and result in the government bleeding in arbitration payouts. Cases such as the Idea Cellular-AT&T deal, SABMiller buying 100 per cent in Foster’s India and General Electric selling a majority stake in Genpact could go against the tax department.

North Block believes that despite several international chambers lobbying against the amendment, the actual case will have no bearing on FDI inflows. Finance ministry officials believe a clear and rational tax policy exists, and firms appreciate attempts to treat all deals on a par

In a survey of top MNCs by Unctad, India has been ranked the third most attractive destination for 2012-2014. The survey was part of World Investment Report prepared by the UN body.

Releasing the report here, ESCAP’s chief economist Nagesh Kumar said that “isolated cases of tax disputes like Vodafone was unlikely to affect FDI flows” .

One option before the government is to let the case go to international arbitration. Vodafone has already sent a trigger notice for arbitration to the government under the bilateral investment treaty with the Netherlands, stating the retrospective amendment is against the spirit of the treaty. However, the problem is that the government may later be taken to task for not collecting punitive taxes before allowing the case to go for arbitration.