India’s tax authorities have finally slapped a tax demand on the real party to make capital gains when UK telecom giant Vodafone entered the Indian market. Hong Kong-based Hutchison Telecommunication International Ltd (HTIL) sold its 67% stake in its mobile telephony business to Vodafone for $11bn in 2007.
Until now, the authorities chased Vodafone for not withholding tax from payments to Hutchison. The government’s income tax department has now served a draft assessment order on Hutchison alleging gains made on its stake sale to Vodafone – a demand that amounts to $5bn in tax, interest and penalty.
In a filing to the Hong Kong stock exchange, CK Hutchison Holdings (parent of HTIL), stated its subsidiary has been served with a tax demand for $1.2bn, $2.6bn in interest and another $1.2bn in penalty payment.
For its part, HTIL says taxes cannot be imposed, because the order is based on the retrospective tax legislation that overturned a Supreme Court judgment of January 2012 that ruled in favour of Vodafone. The court had stated that this acquisition was not taxable in the country. HTIL’s defence thus is virtually the same as Vodafone’s, when the latter contested the tax department’s outstanding demand inclusive of interest and penalty of $2.2bn.
With the benefit of hindsight, the tax authorities should have targeted Hutchison when the offshore sale transaction took place a decade ago. The reputational damage to India’s image as an attractive investment destination could have been avoided as Vodafone sought international arbitration to settle its well-publicised battle with the tax authorities. As several conciliation efforts with revenue and union finance ministry officials – including a one-time settlement offer with only the tax demand to be paid and interest and penalty waived – did not succeed, arbitration proceedings are still ongoing.
A permanent solution is for the amendment in the country’s laws to allow retrospective taxation of offshore mergers and acquisitions to be removed from the books. This has not happened until now, although since 2014 the NDA government has repeatedly assured international investors it would not resort to retrospective taxation.
N Chandra Mohan is an economics and business commentator based in New Delhi.