JOIN USThe Supreme Court judgment in favour of the telecom multinational Vodafone over its 2007 deal with Hutchison Whampoa is a major setback for India’s tax authorities and the government, which has now been forced to forgo the huge Rs 11,800 crore tax income it was expecting.
While the government’s disappointment is understandable, the ruling cannot be faulted because it clearly stuck to the law as it is. The acquisition of Hutchison Essar’s telecom business in India by Vodafone was done through a transaction abroad in Cayman islands.
The Indian authorities’ argument that the transaction resulted in the transfer of Indian assets and business in India and was hence liable to invite tax in India may be true in logic and substance but the law did not explicitly provide for such an eventuality. The Supreme Court rightly felt that the Indian law did not have territorial jurisdiction over the deal.
Vodafone could have been faulted if it could be proved that it had tried to make arrangements with the purpose of defeating the purpose of the law. This could not be done. It is also important to note that any individual or entity has the right to avoid tax through clearly legal means, though not to evade it. The court has done well to interpret the law as it stands because it will give confidence to the investor, and stability to the tax system. Predictability is an important aspect of the rule of law. It is not good for a country to give the impression that its laws would be interpreted to suit the convenience and needs of the authorities, in business and commerce, politics or any other field.
Perhaps the Indian law did not provide for situations like the Vodafone deal because they had not been foreseen. The loss of revenue involved may be notional now but it is substantial. There are a number of other deals of a similar nature which are under dispute and may be impacted by the Vodafone judgment. It is important to set the principles right and give them the correct expression in the laws. The direct tax code, finalised by the government, has a provision which will fill the present legal vacuum but it may be implemented only next year.
The government should consider the possibility of introducing such a provision as part of the coming union budget. But finding ways to implement it with retrospective effect will send bad signals.