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Vodafone wins India tax case

Supreme court ends Indian tax office’s pursuit of British mobile phone operator for £1.3bn unpaid tax bill

India has dropped its pursuit of Vodafone Group for a £1.3bn unpaid tax bill relating to the British mobile phone operator’s £7bn purchase of Hutchison Essar, in a move that will reassure foreign companies at a time when the subcontinent’s economic boom is slowing.

The supreme court ruling put an end to the Indian tax office’s long-running battle to extract capital gains tax for one of the country’s biggest corporate takeovers, which was conducted in 2007 through offshore companies.

Vodafone, which has invested an estimated £12bn in its Indian venture, fought its case on the grounds that the tax was applied retrospectively and that capital gains are usually paid by the seller, not the buyer.

“Certainty and stability form the basic foundation of any fiscal system,” chief justice SH Kapadia concluded. “Investors should know where they stand. It also helps the tax administration in enforcing the provisions of the taxing laws.” In a back-up ruling, supreme court judge KS Radhakrishnan said forcing Vodafone to pay up would have amounted to “imposing capital punishment for capital investment”.

The ruling lifted Vodafone shares 3% in morning trading, coming as a surprise to investors who had witnessed a concerted campaign to claw back tax from foreign companies trading Indian assets. The brewer SABMiller was slapped with a .5m (£25.6m) tax bill last year after acquiring Foster’s Indian operations in 2006, while the authorities are closing in on the sale of a local vaccine company to the French drugs group Sanofi.

Vittorio Colao, Vodafone chief executive, said: “We are a committed long-term investor in India and we have made clear all along that we have faith in the Indian judicial system. We welcome the supreme court’s decision, which underpins our confidence in India. We will continue to grow our Indian business – including making significant investments in rural areas and in 3G network coverage – for the benefit of Indian consumers.”

The ruling removes one obstacle to Vodafone’s hope of floating a stake in the Indian business on the Bombay stock exchange. Depending on the outcome of the current review of telecoms regulation, Vodafone is looking at a listing in 2013, which analysts say could raise £3.4bn from a 30% stake.

“Such a move would generate cash, potentially to be used to pursue in-market consolidation, and also put some of the ownership of the company into local Indian hands, which could cause the regulators to take a slightly kinder view on the company for future matters,” said Robin Bienenstock, a financial analyst at Bernstein Research.

Vodafone was seen as a test case for the treatment of foreign investors in India, and could also set the tone for other nations including China. Kevin Phillips, a partner at Baker Tilly accountants, said: “The case represents a huge relief, not just for Vodafone, but for a host of other large multinationals that have undertaken similar deals in India and that were anxiously awaiting the outcome. There are a number of other important territories that also tax capital gains made by foreign investors on disposals of shares in companies in their territory (notably China). Foreign investors in such territories can breathe a little easier as a result.”

Foreign investors have been pulling out of India as the country continues to struggle with inflation and a series of high profile corruption scandals – in one of the biggest a former minister has been charged with taking millions in bribes during the sale of 2G mobile phone spectrum.

Using a subsidiary registered in the Netherlands, Vodafone bought 67% of Hutchison Essar from the Hong Kong conglomerate Hutchison Whampoa, via a company registered in the Cayman Islands, in 2007. The Indian government argued Vodafone should have held back from Whampoa a sum equivalent to the capital gains tax due on the deal.

Vodafone is buying out its remaining partner in the business, Essar Group, having agreed to pay £3.2bn for the Indian firm’s 33% stake in the joint venture.

India’s economic growth has been revised down to 7.2% this year, from previous estimates of 9%, and lower than the 8.5% expansion in 2010-11. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds