India expects tax settlement with Vodafone, seeks to reassure investors

"Vodafone has formally written to the government offering to engage senior government officials to find a way out of the problem," Finance Minister Palaniappan Chidambaram told the Financial Times, adding that a settlement could come within a month.

The dispute arose from the British telecom operator's $10.6 billion acquisition of Hutchison Essar in 2007. The transaction was structured offshore, which meant that no capital gains tax was owed to the Indian authorities. However, the government subsequently decided to change the way cross-border deals are taxed - and implement the measures retroactively.

Vodafone maintains that no tax is payable, a position that was upheld by a Supreme Court ruling in January 2012. It has been suggested that a resolution could involve India waiving the interest and penalty portion of the charge and accepting a reduced amount for the main payment.

With Chidambaram replacing Pranab Mukherjee as president last year, foreign investors hoped that India would take steps to eliminate concerns that it is inconsistent on economic reform and unfriendly towards overseas capital. Foreign direct investment understandably declined in the wake of the global financial crisis, but it recovered only moderately in 2011.

"In the last five months financial institutions have re-invested in India's capital markets," Vikram Utamsingh, head of transactions and restructuring services for KPMG India, told AVCJ in December. "People are starting to get some comfort that the government will do the right thing. There is a national election in 2014 so that gives the government 18 months to continue its reform agenda."

However, industry participants warn that, for all the good intentions espoused by the government, it remains to be seen if it stands by them.

A decision last year to permit foreign investors to acquire majority interests in domestic multi-brand retail enterprises in cities with populations of more than one million was subsequently rolled back in the face of political opposition. In September, the cabinet enacted the measure - alongside policies permitting FDI in the aviation and broadcast industries - but allowed state governments to oversee the implementation. The decision still faces legal and political challenges.

One area where this is now more clarity is the general anti-avoidance rules (GAAR) proposed in the 2012 budget. The objective is to prevent investors using treaty jurisdictions - notably Mauritius - purely for the tax benefits offered by "looking through" structures that are deemed to lack commercial substance. Much like the Vodafone case, the concern is that these measures might be implemented retroactively.

A high-level committee was appointed to review the situation and it recommended that GAAR be postponed for three years to allow time for tax officials to be trained and that, when the measures are introduced, they shouldn't apply to existing investments. These recommendations have now been endorsed by the government.

"No one is opposed to a regime where there is a tax, so long as there is a policy in place that is transparent," Mark Silgardo, senior managing partner at IL&FS Investment Managers, observed in an AVCJ webinar in December. "Let's say we exit an investment today and the tax environment were to change, then in many cases the GP would be hauled over the coals by the authorities. It's in everybody's interests that there is a policy in place and everyone knows where they stand."

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Regulation
• South Asia
• Offshore
• tax
• regulation
• India