Vodafone to Continue International Arbitration on Tax Case

Vodafone to Continue International Arbitration on Tax Case

Telecom major Vodafone will continue the international arbitration process in the Rs 20,000-crore tax dispute with Indian authorities as the government today decided not to drop retrospective amendment in tax laws.

"We note the FM's announcement that existing cases arising from the 2012 retrospective tax law should follow the lawful process in which they are currently being adjudicated," Vodafone said in a statement.

Vodafone will therefore continue process of international arbitration initiated under the India-Netherlands Bilateral Investment Treaty, it added.

In his maiden Budget speech, Finance Minister Arun Jaitley said that consequent to certain retrospective amendments introduced to the Income Tax Act 1961 through the Finance Act, 2012, a few cases had have come up in various courts and other legal fora.

"These cases are at different stages of pendency and will naturally reach their logical conclusion," he added.

The minister said the sovereign right of the government to undertake retrospective legislation is unquestionable.

Vodafone said: "From the outset, we have maintained that there was no tax to pay, a view upheld by India's Supreme Court, and the retrospective law in any case concerned tax on the gain made by Hutchison: Vodafone, as the buyer, clearly made no capital gain whatsoever," it said.

The firm added the "notion" of retrospective withholding obligation is both "unjust" and constitutes "imposition of a burden of impossibility of performance".

The Supreme Court had ruled in Vodafone's favour in 2012, saying the company was not liable to pay any tax over acquisition of assets in India from Hong Kong-based Hutchison.

The government, however, amended tax laws with retrospective effect to undo the Supreme Court judgement and claim taxes.

In April, Vodafone International Holdings B V served an arbitration notice under the Bilateral Investment Protection and Promotion Agreement between India and the Netherlands for resolving its tax dispute.

Following the notice, the previous UPA government on May 15 approved withdrawal of a conciliation offer.

While the basic tax demand was Rs 7,990 crore, the total outstanding, including interest and penalty, is estimated to have risen to Rs 20,000 crore. (MORE)

The Finance Minister in his Budget speech also said that all fresh cases arising out of retrospective amendments of 2012 in direct transfers will be scrutinised by a high-level committee to be constituted by the Central Board of Direct Taxes (CBDT) before any action is initiated in such cases.

"However, this power has to be exercised with extreme caution and judiciousness keeping in mind the impact of each such measure on the economy and the overall investment climate. This Government will not ordinarily bring about any change retrospectively which creates a fresh liability," Jaitley said.

"The government will not ordinarily impose any tax retrospectively that will impose a ‘fresh liability’. Many of these impositions have, unfortunately, happened through clarifications and subjective interpretations and not necessarily through fresh legislations," Ramesh Vaidyanathan, Managing Partner, Advaya Legal on Retrospective Taxes, said.

BDO India Partner Pranay Bhatia said while promising a stable and a predictable taxation regime which is investor friendly, the Finance Minister has "ducked" foreign investor's expectation of restricting the retrospective operation of amendments introduced by earlier Finance Act.

"Impact of review of retrospective taxation by the high level committee will be seen only when the constitution of such committee and its mandate is known," he added.

Expressing similar views, Deloitte Haskins & Sells Partner N C Hegde said one of the biggest dampeners has been the reluctance of the government to do away with the retrospective tax on indirect transfers as well as on royalties.

Ketan Dalal, Senior Tax Partner at accounting firm PwC India said the composition of the high level committee and the framework for decision making is unclear at this stage.

"It seems that there have been constraints in neutralisation of the amendment, but some middle path will be evolved," he added.

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