Vodafone's Taxation issues in India

My name is Priyabrat and I will be presenting on the topic ‘Vodafone's Taxation issues in
India’. This is a classic case of Retrospective Taxation. I will be breaking the topic in 4
section
1.Introduction about the matter
2. Why Vodafone entered into India through Push/Pull factors
3. Importance of Adminstrative Distance of India w.r.t Global context
5.Road Ahead for India
1. Introduction
Vodafone, a telecom giant entered into India in 2007 through acquisition of Hutchison Essar,
which was then one of the leading players in Indian telecom industry. Special Purpose
Vehicle used for acquisition was Vodafone International Holdings based in Netherlands. It
acquired full stake in Cayman Islands which held 67% stake in Hutchison Essar and
remaining 33% was held by Essar. The deal amount was $11.1 Bn.
In September that year,Indian government demanded Capital Gains tax of around Rs 8000
crores under the Income Tax Act 1961 on the ground that transaction involved sale of
Assets situated in India. But, it was mentioned explicitly that the tax will be collected for
Indirect transfer also. Then, The case was taken to the Bombay High Court which was ruled
in favor of the Government of India in 2010. But then, Vodafone appealed to the Supreme
Court, the judgment was overruled in 2012 since they perceive it to be tax planning step.
But Indian government circumvented the SC ruling and an act was passed, giving Income
Tax department the power to tax past deals occurred after 1962. Vodafone was troubled
again. There were non-market strategies adopted to settle the issue but they
failed.Vodafone again found a hope by invoking Clause 9 of the Bilateral investment treaty
signed b/w India and Netherlands in 1995. The treaty was meant to ensure fair and
equitable treatment for companies operating in the other country’s territory. Since the
acquisition’s SPV was based in Netherlands, it could do so. Finally in Sep 2020, Permanent
Court of Arbitration (PCA), The Hague ruled the judgement in favour of Vodafone and
directed the Indian government to reimburse the company a sum of Rs40.3 crores which is
approximately 60% of the legal cost incurred by the company.
2. Motivation for Vodafone entering into India-
We can say there was Asset seeking motivation and also Market seeking motivation. In
Market seeking, Vodafone Plc entered the deal to gain access to Hutch’s existing 23.3
million subscribers and 16.4% of the market share. The cellular penetration was
increasing and 3G was set to take off. In Asset seeking, it acquired Hutch’s cellular
network infrastructure.

3. Administrative Distance , Image of India, Ease of Doing business, Change in Tax laws
Here, we can see how CAGE framework’s Administrative distance is important while
entering a foreign market. In 2007,India’s Ease of Doing Business Index rank was 134.
Indian wanted to attract FDIs but then also they took the amendment of Act step which
was severely criticized from the global investors.So, it’s a lesson for any company that it
should analyze the administrative distance too while deciding to enter any foreign
market.

After the decision in Hague, India has still option to challenge the verdict in High court of
Singapore. A very similar case of UK’S Cairn Energy PLC for a levy of about Rs10,000
crore is pending for arbitration. According to me, India should accept the verdict as India
is in dire need of FDIs and this will create a good image in foreign investors. India should
plan for better tax reforms so that the valid taxes are collected and there are no
loopholes as such.