How would it feel to get Rs 11,000 crore? Just ask Vodafone and you will get the answer. The Supreme Court decision for relief to Vodafone in the Rs 11,000 crore tax must have led to a sigh of relief at its London headquarters. Fought over a time period of almost 5 years, the decision once again outlines the independence of judiciary and the legislative & executive in India.
What was all the ruckus about? The story starts when Vodafone entered into an agreement with Hutchison Telecommunication International Limited for acquisition of its 67% share in Hutchison-Essar. The deal led to transaction worth $11.206 billion. The IT department, in September 2007 accused Vodafone of failing to deduct Indian tax on payment to HTIL and a show cause notice was issued. To understand why Vodafone was supposed to pay tax, we need to understand the meaning of capital gain. Capital Gain refers to profit in investment in a capital asset. If you purchase a plot today and sell it two years late, the profit is the capital gain. And like on everything else, we have to pay a tax for it. This capital gain tax is precisely what the taxman demanded. The Bombay High Court, in 2010 rejected the appeal of Vodafone and upheld the IT department's demand.
It is difficult to imagine why then has the decision been reversed by the supreme court and on what basis did it overturn the decision? The explanation of tax seems to make it evident that Vodafone are the culprits. But this case had a flip side to it. Hutchison is a Hong_kong based company while Vodafone is British based. The argument put forth was that the law allows taxation of income deemed to accrue or arise in India through the transfer of a capital asset "situated in India". Since both the companies involved are non-Indians, the law does not apply onto them. The Bombay high court had rejected the argument saying that the source of income for the company was from India. But source of income lies where the transaction takes place and not where the economic interest lies. And since there is no explicit mention for out of country promoters, Vodafone argued that thy have no liability towards the IT department.
The Supreme Court handed the decision in favor of British telecom giant saying that unclarity in laws and legislation need to be overcome to prevent such situations from arising. It said that it could hold Vodafone accountable if there were specific laws that took care of this situation or if it could be proved that the transaction had been carried out to evade tax. It also asked the IT department to return the Rs 2500 crore deposited with it with 4% interest.
The decision has naturally made the finmin sit up and take notice. Already, a team has been formed to review the case. There are also talks about forming clear and unambiguous laws to avoid such precedence. But the decision is likely to improve the foreign investor sentiment. Buoyed by this decision, it is believed that the outlook towards investment in India is going to improve. At the same time, it needs to be ensured that no-one can make use of these ambiguous laws to his own profit.
What was all the ruckus about? The story starts when Vodafone entered into an agreement with Hutchison Telecommunication International Limited for acquisition of its 67% share in Hutchison-Essar. The deal led to transaction worth $11.206 billion. The IT department, in September 2007 accused Vodafone of failing to deduct Indian tax on payment to HTIL and a show cause notice was issued. To understand why Vodafone was supposed to pay tax, we need to understand the meaning of capital gain. Capital Gain refers to profit in investment in a capital asset. If you purchase a plot today and sell it two years late, the profit is the capital gain. And like on everything else, we have to pay a tax for it. This capital gain tax is precisely what the taxman demanded. The Bombay High Court, in 2010 rejected the appeal of Vodafone and upheld the IT department's demand.
It is difficult to imagine why then has the decision been reversed by the supreme court and on what basis did it overturn the decision? The explanation of tax seems to make it evident that Vodafone are the culprits. But this case had a flip side to it. Hutchison is a Hong_kong based company while Vodafone is British based. The argument put forth was that the law allows taxation of income deemed to accrue or arise in India through the transfer of a capital asset "situated in India". Since both the companies involved are non-Indians, the law does not apply onto them. The Bombay high court had rejected the argument saying that the source of income for the company was from India. But source of income lies where the transaction takes place and not where the economic interest lies. And since there is no explicit mention for out of country promoters, Vodafone argued that thy have no liability towards the IT department.
The Supreme Court handed the decision in favor of British telecom giant saying that unclarity in laws and legislation need to be overcome to prevent such situations from arising. It said that it could hold Vodafone accountable if there were specific laws that took care of this situation or if it could be proved that the transaction had been carried out to evade tax. It also asked the IT department to return the Rs 2500 crore deposited with it with 4% interest.
The decision has naturally made the finmin sit up and take notice. Already, a team has been formed to review the case. There are also talks about forming clear and unambiguous laws to avoid such precedence. But the decision is likely to improve the foreign investor sentiment. Buoyed by this decision, it is believed that the outlook towards investment in India is going to improve. At the same time, it needs to be ensured that no-one can make use of these ambiguous laws to his own profit.
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