The Mumbai High Court ruled that the transaction of Vodafone to buy a 67% stake in Hutchinson Essar must be subject to Indian capital gain taxes because Hutchison Essar had operating assets in India. Vodafone, the world’s largest mobile company, was ordered to pay $2.53 billion in back taxes within thirty days for an acquisition that occurred three years ago. India’s position is that when Vodafone acquired Hutchinson Essar, it also acquired Indian telecom assets because Hutchinson Whampoa, the seller of the transaction, had an indirect share in India. Thus, the Mumbai High Court subjected Vodafone to taxes because India was indirectly one of the holding companies for Hutchinson Essar that enabled the transaction to go through.
Vodafone strongly opposes the Indian tax courts assessments of what they owe and allege that the Indian tax authorities are interpreting Indian tax law inconsistent to what they have been doing in the past. Foreign investors are anxiously awaiting the final result because it will set precedent for cross-border deals in India. Vodafone has told India that if it is forced to pay these back taxes, this outcome would have a detrimental effect on future investment in India. The Case will be brought to the Supreme Court in New Delhi for the first time on October 25, where Vodafone is prepared to vehemently argue that Vodafone must not be subject to liability because the transaction to acquire Hutchinson Essar did not occur in India and that there are several indirect holding companies when acquiring a company.
Do you think the Supreme Court in India will consider how Vodafone’s tax bill will affect India’s relationship with Vodafone and prospective foreign investors? How should India, one of the fastest growing developing nations (BRIC- Brazil, Russia, India, China) balance its need to protect state sovereignty and adhere to its tax laws against its reputation in the global economy? What message will this outcome send to other BRIC nations about implementing tax bills on foreign direct investors?
See James Fontanella-Khan, Vodafone Ordered to Pay Tax on Indian Deal, FT Times, October 23, 2010, at 10.