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India stands firm on retrospective tax law that could reopen Vodafone case

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George Osborne told journalists earlier this week that he ‘candidly conveyed’ to the Indian government his concerns over proposed changes to India’s tax code that could reopen a $2.9bn dispute with Vodafone. But Britain was ‘stumped’, according to Indian press reports, when officials pointed out that the UK was no stranger to retrospective anti-avoidance measures.

As Tax Journal reported in January, India’s Supreme Court held that Vodafone had no liability to account for withholding tax on its acquisition of interests in Hutchison Essar Limited in 2007. Tax lawyers hailed the telecoms group’s victory as a ‘landmark decision’ for the foreign investment community, adding that it was ‘of even wider significance given what the judges said about tax avoidance’.

Vodafone had argued that India had no jurisdiction to tax the gain on a transaction outside India between two non-Indian companies. The Indian Revenue sought to tax capital gains arising from the sale of a company’s shares on the basis that the company whose shares were sold held underlying Indian assets. Both that company and the vendor company were resident in the Cayman Islands, under a structure set up before Vodafone’s acquisition.

‘Unfettered retroactivity’

Seven business associations including the CBI wrote to the Indian Prime Minister expressing ‘deep concerns’ over India’s plans. ‘If enacted, these proposals will significantly alter the Indian taxation of our member companies, with retroactive effect extending back for as much as half a century, and reverse many decided cases,’ the group wrote, according to the Financial Times.

‘Some of our member companies had already begun reevaluating their investments in India due to increasing levels of controversy and uncertainty regarding taxation in recent years.’

The group, representing more than 250,000 companies, argued that the ‘unfettered retroactivity’ of the proposals departed ‘significantly’ from the practice followed in other countries. Other provisions in India’s Finance Bill appeared ‘to permit revenue authorities to act unchecked by the judiciary’, they said.

The Chancellor told the Financial Times: ‘We are not threatening any retaliatory actions. What India needs, like all countries, is a stable and predictable tax system to encourage investment and we have concerns that this Budget proposal would not add that.’

‘Sauce for the goose’

India appeared to have ‘stumped Britain as far as retrospective amendment in the tax law to deal with cases such as Vodafone is concerned’, India Today reported. Osborne took up the Vodafone issue with Finance Minister Pranab Mukherjee, ‘but it turned out that the UK had done exactly the same thing to bring entities based in tax havens under the tax net’.

‘In an incredible coincidence, the UK has also in its Budget for 2012, presented on February 27, introduced retrospective provisions to check the avoidance of corporation tax. So clearly, what's sauce for the goose should be sauce for the gander,’ the report said in a reference to a UK Finance Bill amendment to the loan relationships rules. The amendment will apply, in relation to certain arrangements, from 1 December 2011.

Judicial review

Indian finance ministry officials had also ‘dug out’ details of other retrospective amendments to UK law, including FA 2008 s 58 which was upheld by the Court of Appeal last July.

Simon’s Tax Cases records that in R (on the application of Huitson) v HMRC [2011] STC 1860 LJ Mummery concluded that it was ‘within the area of discretionary judgment for Parliament to legislate with retrospective effect to ensure a fair balance between the interests of the great body of resident taxpayers and of the individuals who sought to benefit from [a scheme seeking to take advantage of double taxation agreement]’.

That case was heard together with R (oao Shiner) v HMRC [2011] STC 1878. Mummery said in his judgment: ‘If s 58 were not made retrospective, the claimants would obtain a windfall at the expense of the general body of taxpayers. It would be unfair to the general body of resident taxpayers not to have given s 58 retrospective effect.’

India Today noted that ‘in a sense, the boot turned out to be on the other foot enabling Mukherjee to more than hold his ground’.

The Economic Times said in an editorial: ‘If New Delhi drops its tax demand on Vodafone, after British chancellor George Osborne's warning of dire consequences for the economy, every political party will pounce on the ruling coalition for surrender before the Raj.

‘[Mukherjee] made it clear to Osborne that India was firm on amending the law retrospectively to tax overseas transactions leading to change in control of assets in India. Therefore, India would have jurisdiction over Vodafone's purchase of Hutchinson's interest in its mobile telephony joint venture with Essar, though the deal was executed in Cayman Islands.’


Osborne did not escape criticism in the UK. Andrew Clark, Deputy Business Editor of The Times noted that the Chancellor ‘popped up in Delhi yesterday, warning the Indian Government against slapping Vodafone with tax penalties’.

‘Osborne is upset that India intends to change laws on tax retrospectively, forcing companies to pay levies on overseas transactions going back 50 years,’ Clark wrote. ‘Such a move would be unfair, said the Chancellor, who backs a “stable and predictable” tax structure.

‘Wasn’t this exactly what Barclays complained about only last month, when the Treasury retrospectively changed Britain’s rules to catch its aggressive tax avoidance?’

The Treasury said in February that it had taken action to counter contrived arrangements that were contrary to HMRC’s Code of Practice on Taxation for Banks.

A joint press release issued after Osborne’s meeting failed to mention the Vodafone issue. ‘Both sides recognized the need for countries to sign the Multilateral Convention on Mutual Administrative Assistance in Tax Matters and engage in automatic exchange of information where legally required, to improve tax compliance and decrease tax evasion,’ HM Treasury and the Indian Ministry of Finance said.