Amid intense lobbying by global trade bodies in favour for Vodafone in the Rs 11,000 crore tax dispute case, the Finance Ministry today asserted that similar transactions are taxed in USA, UK and other European nations.
A Finance Ministry official also questioned the decision of the British telecom major to invoke India-Netherlands investment treaty saying the USD 11.2 billion deal was signed in Cayman Island.
"Such transaction (overseas M&As involving domestic assets) are leviable to tax in USA, UK, other OECD countries and in China," Finance Secretary R S Gujral told PTI.
The issue pertains to the proposed amendment in Income Tax Act with retrospective effect, which would bring Vodafone-type deals under tax net and the UK-based telecom firm would be liable to pay Rs 11,000 crore tax for its acquisition of Hutchison's stake in Hutchison Essar Ltd in May 2007.
Gujral further said : "There was a substantive retrospective amendment in UK whereby they taxed Barclays.... Now if such transactions are leviable to tax there, then why should they (companies) not pay tax here?," Gujral questioned.
Vodafone in a statement clarified, it "pays tax in the UK as a UK tax resident. Vodafone has not been asked to pay taxes in the UK because of any retrospective amendments".
Gujral further said the Revenue Department had alerted both Vodafone and Hutch in March 2007 that the proposed transaction was prima-facie liable to tax and Vodafone should withhold tax before remitting money.
However, he added, "despite that Vodafone remitted money without withholding tax. Obviously they have taken a conscious considered view based upon whatever legal advise they might have received".
Several global bodies have written letters to Prime Minister Manmohan Singh and other ministers saying that the government's proposal to amend Income Tax Act to bring into tax net Vodafone-type overseas deals involving domestic assets would hurt foreign investment.
They have asked US Treasury Secretary Timothy Geithner to raise the issue at ongoing IMF-World Bank meetings in the US and also with Finance Minister Pranab Mukherjee.
Referring to the recent threat of Vodafone to invoke bilateral investment treaty with the Netherlands on the tax issue, Gujral said, "there is no cause of action for BIPA at this point of time because, they have a Supreme Court decision in their favour. Currently it is only a proposal before Parliament. Parliament is yet to consider. So till any law is passed we have no cause for action."
Another Finance Ministry official said, "The deal happened in Cayman islands and they are invoking India-Netherlands BIPA...While in the Supreme Court Vodafone said that the deal happened outside India, under BIPA it is saying it has made substantial investment in India."
Vodafone, however, said "the Treaty explicitly applies to indirect investments and our transaction is therefore clearly one which qualifies for Treaty protection.
"Vodafone believes that if the retrospective tax proposals were enacted it would amount to a denial of justice and a breach of the Indian government's obligations under the BIT (Bilateral Investment Treaty) with the Netherlands to accord fair and equitable treatment to investors", the company said.
Earlier this week the Dutch Subsidiary of UK-based Vodafone served a 'dispute notice' to the government threatening international arbitration under the BIPA.
Vodafone, it may be mentioned, had earlier won the tax dispute case in the Supreme Court which held that the company was not liable to pay Rs 11,000 crore stemming from its 2007 acquisition of Hutchison's stake.