Written by Sanjeev Kulkarni
Econintersect: If you think that ‘Back to The Future‘ is only possible in Spielberg comic science fiction films you might change your mind. The Indian government has made this possible in real life, debunking Einstein’s Theory of Relativity.
In the first movie a seventeen year old teenager Mart McFly is accidentally transported into past. Marty inadvertently causes his mother Lorraine to fall in love with him, rather than with his father George McFly, beginning a paradox that would cause Marty to disappear from existence. Except in this case it the Indian government has traveled into the past to wipe out Vodafone
.Vodafone had successfully won the $ 2 billion tax case in the Indian Supreme Court. In May 2007, Vodafone bought Hutchison Telecommunications International Ltd’s 66.98% stake in Indian telecom company Hutch Essar Ltd for $11.2 billion. Hutchison controlled its Indian telecom subsidiary through a Cayman Island company called CGP. CGP’s shares were sold to Vodafone, which consequently became majority owner of the Indian telecom firm.
The issues that were argued before the Supreme Court include the transfer of shares resulting in transfer of underlying assets, the extra-territorial applicability of section 195, income chargeable to tax under section 9, but the crux of the argument was whether the transaction was designed to avoid tax.
Smarting under the Supreme Court Ruling, the Indian Government initial March 2012 budget proposed legislation to overturn the landmark Supreme Court ruling in favour of Vodafone. It did what the Indian bureaucracy (or babus) are infamous for, come out with bizarre proposal which asserts the state’s right to retroactively (from April 1, 1962) tax cross-border share sales in which the underlying asset is located in India.
No one is arguing on the need to tax such proposals in future, but this retroactive proposal is unbelievable. Vodafone has now hit back and is threatening to drag the Indian Government to international arbitration.
The strange ways of the present government are hard to understand. On one hand the Government is desperate to attract FDI (foreign direct investment). On the other hand it comes out with clumsy measures which will drive away international investors.
This is not the first time that the executive has tried to circumvent the Judiciary by changing the rules of the games retrospectively. Even in the same 2012 Budget legislation there is another proposal to change tax laws retroactively to 1976 that would result in substantial additional tax payments for the sale of packaged software. From an article in The Economic Times:
Baker & McKenzie, writing on behalf of the Software Coalition group, which includes Microsoft, Oracle and Adobe, warned that if the tax changes are implemented, software companies could reconsider the amount they are willing to invest in India.
“To impose new rules with retroactive effect to 1976 under the guise that they are clarifications violates fundamental notions of fairness,” the law firm’s partner, Gary D Sprague, wrote in an April 10 letter also marked to Finance Minister Pranab Mukherjee, Law Minister Salman Khurshid and Commerce Minister Anand Sharma.
The Economic Times says their sources have estimated that the tax revenues resulting could be “staggering,” running into billions of dollars.
We shudder to think if the executive decides to change the Indian Constitution retrospectively by an executive order.
- Budget 2012 proposes law that could overturn Supreme Court ruling in Vodafone case: The Economic Times, 17 April 2012
- Top software MNCs lobby against software tax changes in the Budget; warn of cut in investments The Economic Times, 19 April 2012
About the Author
Sanjeev Kulkarni is an entrepreneur based in Pune, India. He worked for large organizations in board level position before venturing on his own. He is currently involved as an investor in health care software company and as an investor, mentor in an automation company. Very widely traveled, he has experience of working in different geographical areas with people of varying nationalities. He did his BS from Indian Institute of Technology, Delhi.