The government is set to challenge an international arbitration decision favouring the Vodafone Group on a retrospective tax demand of ₹ 20,000 crore, sources said.
The government has reportedly decided to act on Solicitor General Tushar Mehta’s opinion that the arbitration decision should be challenged. The top government lawyer has reportedly advised that an arbitration tribunal’s decision cannot go against the law passed by a sovereign parliament.
An international arbitration tribunal in The Hague had ruled last month that India’s imposition of a tax liability on Vodafone, as well as interest and penalties, breached an investment treaty agreement between India and the Netherlands.
The international tribunal said the government must stop seeking dues from Vodafone and should instead pay more than ₹ 40 crore to the company as partial compensation for legal costs.
The tax dispute involving ₹ 12,000 crore in interest and ₹ 7,900 crore in penalties started with Vodafone’s acquisition of Indian mobile assets from Hutchison Whampoa in 2007. The government said Vodafone had to pay taxes on the acquisition but the company disputed it.
A tax demand of ₹ 11,000 crore was raised by the government related to Vodafone’s $11 billion acquisition.
The Supreme Court had ruled in favour of Vodafone in 2012, but the government, later that year, changed rules which empowered it to tax deals retrospectively. Two years later, Vodafone initiated arbitration proceedings against India.
In July, the Supreme Court asked the Income Tax department to refund ₹ 833 crore in taxes to Vodafone Idea. In September, the top court gave mobile carriers 10 years to pay back dues owed to the government, offering some respite for Vodafone Idea.
The cash-strapped telecom major has been struggling to pay its AGR (adjusted gross revenue) dues. So far, it has paid around ₹ 7,854 crore of its AGR dues, it still owes roughly ₹ 50,000 crore to the government.
Finance Ministry sources said the government will decide on challenging the award before a court in Singapore – which was the seat of the arbitration, after taking legal opinion.
While the cost implication in the case is limited to having to pay ₹85 crore to Vodafone in legal cost, what is weighing on the government mind is a separate arbitration involving UK’s Cairn Energy plc.
If a separate arbitration panel were to hold a demand for ₹10,247 crore in taxes using the same retrospective legislation as illegal, the government will have to pay Cairn as much as USD 1.5 billion ( ₹11,000 crore).
This is the amount equivalent to the value of shares of Cairn that the government had sold to recover a part of the tax demand. It also includes the dividends and tax refund seized.
Sources said Vodafone International Holding (a Netherland company) had in February 2007 bought 100 per cent shares of Cayman Island-based company CGP Investments for USD 11.1 billion to indirectly get 67 per cent control of Hutchison Essar Ltd – an Indian company.
The Tax Department felt the deal was designed to avoid capital gain tax in India and so imposed a tax demand, which was rejected by the Supreme Court in 2012.