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Vodafone Tax Saga

By Harshita Khindaria and Anna Mehta


The case begins with Hutchison Telecommunications International Limited (HTIL), a Cayman Islands-based company. HTIL was a telecommunication giant providing mobile and internet services in countries like India, Sri Lanka, etc. The company, HTIL didn’t make direct investments in countries, rather they had subsidiaries. One of which was CGP Investments Ltd. CGP investments were based in the Cayman Islands as well and was fully owned by HTIL telecommunications. The company CGP Investments Ltd had made big investments in Mauritius-based entities who in turn held stake in several Indian companies and ultimately a 67% stake in Hutchison Essar Ltd- a joint venture between Hutch and Essar & one of the leading players in the Indian Market.

So, technically, HTIL was managing its Indian operations through a web of companies based in the Cayman Islands and Mauritius. Soon, they decided to exit the country and were looking for buyers, where the Netherlands based Vodafone International Holdings came to the rescue. It acquired CGP Investments Ltd for 11.1 billion and took over its Indian Operations, due to which Hutch Essar became Vodafone Essar.

In September 2007, India’s Tax Department initiated proceedings against Vodafone International Holdings & Vodafone Essar in an attempt to recover approximately 2.1 billion$ in taxes. The tax department claimed that, this acquisition involved sale of Indian Assets and as such any gains made in the process should have been taxed in India. But Vodafone on the other hand disagreed and argued that HTIL sold a Cayman-based company- CGP Investments to a Dutch-based company- Vodafone International Ltd, so how could they pay taxes in India for sale of a foreign company to a foreign entity. This led to a disagreement between the two and Vodafone moved the matter to Bombay High Court, but the court saw things differently and stated that CGP investments didn’t have an independent existence, for starters not even its own bank account & the transaction was only complete after all the rights and entitlements of Hutchison’s Indian assets were transferred, to which Vodafone didn’t relent. The judgement came against Vodafone Ltd. They, moved the case to Supreme Court wherein the discussion largely revolved around one subject, i.e. whether this was a case of deliberate tax avoidance or simply prudent tax planning. After lengthy arguments, the Supreme Court declared that the sale did not amount to tax avoidance and hence, the judgement came out that Vodafone did not have to pay any taxes on that transaction.

But then, the government introduced a new tax bill amending existing regulations, all in an attempt to force Vodafone to pay its taxes. The company knew, that it couldn’t take this case to the Supreme Court due to the new amendments. The only way out was to fight in the International Court. Vodafone approached the Permanent Court of Arbitration at Hague contesting that the amendment of the tax code was a gross violation of fair and equitable treatment promised under Bilateral Investments Treaties. The verdict of the International Court came in favor of Vodafone and the Indian Govt, had to return back the 45 crore they collected from Vodafone and had to compensate the company for all the charges borne at the Tribunal (approximately 40 crore). The downside which comes with the verdict, was that if India disregards the verdict it might lose its place as an enticing investment destination.

India, in contrast to numerous other nations, is in critical need of investments. Yet, the nation is still inclined to take more advantage by increasing a tremendous total inflow of cash in a year rather than from choosing ventures that could give income for many years, and furthermore much required employment opportunities. The instance of the Nokia plant in Tamil Nadu is a pitiful outline of this mentality. The handset manufacturing plant along with additional units employed around 35,000 laborers in its prime. The crackdown by the tax authorities on Nokia for an interest of about Rs. 7,000 crore in 2013 made these individuals jobless as the plant was closed down.


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