Vodafone Tax Case Study

Introduction

In this article, we will discuss about the Vodafone tax case. This tax case was started more than 13 years back and even today this case has not been solved out. We will now find out what makes this case so complicated.

Tax Haven

So before we begin with the case, Let me give a small brief about what is a tax haven. So, A tax haven is generally an “offshore country” that offers foreign individuals and businesses little or no tax liability in a politically and economically static environment. This means Tax havens provide the advantage of little or no tax liability. Why do these countries do so? Tax Haven Countries benefit by way of attracting capital to their banks and financial institutions. Individuals or Businesses benefit by saving tax, which in tax haven countries may range from zero to low single digits. This is a win-win situation. There are many tax havens all over the world. A list of some of the most popular tax haven countries includes the British Virgin Islands, the Cayman Islands, the Cook Islands, The Isle of Man, and Mauritius.

The Deal

  • Four companies were involved in the transaction.
  • First is Hutchison Telecommunications International Limited (HTIL). It is situated in Hong Kong. It holds 100% shares in CGP Investments Holdings Ltd.
  • CGP Investments holdings ltd is situated in Cayman island, Mauritius, and holds 67% shares in HEL.
  • The third company is Hutch Essar Limited (HEL). It was situated in India and was formed by the merger of HTIL and Essar groups.
  • The fourth company is Vodafone International Holdings (VIH). It is situated in Netherland.
  • Before 2007, HTIL owned CGP investments completely and CGP investments had a major stake in HEL in India. This means HTIL was owning HEL indirectly through CGP Investments. Vodafone wanted to acquire HEL. Now if it straight away buys the shares of HEL, then that would attract huge Capital Gains tax in India under the Income Tax Act. To save tax, Vodafone opted to acquire CGP, which is holding company of HEL. So, after the deal, Vodafone became the owner of HEL but indirectly through CGP.
Tax Return Form and Notebooks on the Table

IT Department view

But this transaction came under the notice of our Income Tax department and they did not like it. Their contention was simple- CGP was created just to take benefits of tax exemption. According to them, this was the case of Tax Evasion. They were looking at Substance over form. Substance means reality and form mean what is there on paper. So according to them, the transaction was to transfer rights in HEL to Vodafone. This is because though Vodafone paid 11.9 Billion dollars in consideration for a stake in CGP. But CGP in itself was not doing any business. Therefore Vodafone was served a legal notice as it failed to deduct tax. IT Department issued Rs 11,200 crores plus interest Notice to the Vodafone.

Vodafone goes to Supreme Court

Vodafone however, did not relent. The company approached the Supreme Court where the discussion largely revolved around one subject— Was this a deliberate case of tax avoidance or was it simply prudent tax planning? After all, if Vodafone had designed the transaction in a deliberate ploy to avoid taxes, they could be held liable. But if they could prove they had simply executed the transaction without ill intention, maybe they’d get some reprieve. And after lengthy deliberations, the Supreme Court opined that the sale did not amount to tax avoidance. The judges ruled that Vodafone no longer had to pay taxes on this transaction and that should have been the end of this conversation. The government, however, brought retrospective amendments in 2012, which made Vodafone liable for taxes. Vodafone sued the Indian government at the International arbitration court at Hague and this case is still going on.

Conclusion

So, to conclude this is a very complex tax case and for years, this case has been evolving. Recently a bill was tabled in the parliament to revoke the retrospective effect of 2012 amendments. The International court ruled in the favor of the Vodafone and it is at the discretion of the government whether to comply with that or not. If India taxes Vodafone for that transaction, it will ruin India’s image in ease of doing business ranking. Let’s wait for how government ultimately reacts and what will be the fate of the Vodafone. What do you think? Should government drop the case and pay damages to the Vodafone or should it demand the taxes?