What’s the whole issue? Who’s right?
This story starts with a Telecommunication company in the Cayman Islands called Hutchison Telecom International Limited or HTIL. They had Telecom operations in India, Indonesia, and Sri Lanka. HTIL didn’t deal with these operations directly; instead, they had companies that they operated through. One such company was CGP Investments.
HTIL wholly-owned CGP investments and CGP investments invested into many Telecom Companies, including the Telecom Giant in India, Hutchison – Essar, known as Hutch. CGP investment owned a 67% stake and the Essar Group, and the company became a hit in India with its award-winning advertisement. In 2007 Telecom Giant, Vodafone bought over CGP Investments 67% stake and formed Vodafone Essar. Vodafone bought this stake for 11.1 Billion USD. Paid this vast sum to HTIL without Vodafone paying any tax to the Tax Authorities in India.
The Tax authorities cried foul and demanded taxes. Vodafone, however, refused to pay taxes. Their reason was “this transaction was between a dutch based company, Vodafone and a Cayman Island based company CGP, so why should tax be paid in India.” To sort this out and not pay the taxes demanded, Vodafone took the matter to the Bombay high court. The High Court saw things differently. They reasoned that Hutchison- Essar had made all the money because of using Indian Assets, so it is only fitting to pay taxes in India.
Vodafone still refused to pay and took their fight to the supreme court. In the Supreme Court, the battle was to determine if what Vodafone was doing was a case of Tax Avoidance or a Tactful way of tax planning. If the courts ruled that what Vodafone was doing was to manipulate their way out of paying taxes, they would be guilty of tax avoidance and have to pay taxes. But if it were just a way of tax planning without ill intention, it Would leave them off the hook. After much deliberation, the Supreme Court pronounced its verdict that what Vodafone did was not Tax Avoidance, so it Left them off the hook. But then the government of India did something unpredictable. It amended the tax law in a way to get Vodafone to pay those taxes. It did something called retrospective legislation.
This means that if you change a direction suddenly, you can punish anyone who has violated that law in a fixed period until the amended rule. Like in this case, the government extended this time to 1962, which means that anyone who had violated that part of the law made in this amendment would be prosecuted. But Vodafone stayed in this fight and took the matter to the International Court at Hague, saying that India had violated its terms of the Trade Treaties that allowed Vodafone to open a business in India. After a due course of Legal Proceedings, The International court ruled Vodafone’s favor, arguing that India had breached the agreement’s terms.
The International court further ruled that the government pay back the 45 Crores they had taken from Vodafone and compensate the 40 crores in legal fees that Vodafone had to pay in fighting this case. Now it’s not like it’s the end of the government’s battle, and they can no longer resist the issue with Vodafone. They can appeal in the appeals court, or they could contest that a tax matter in India can’t be decided in an international court and can choose to ignore the verdict entirely. But if this happens, India would lose its credibility as a place where foreign investors can conduct smooth business operations. And that’s the story of the Vodafone tax battle.