Vodafone’s £2.85bn tax victory clears way for India investments

TELECOMS giant Vodafone yesterday won a crucial tax case in India in a ruling that removes significant uncertainty for foreign companies investing in the country.

India’s top court said it is not liable for up to $4.4 billion (£2.85bn) in back taxes and penalties. The decision will come as a relief to international investors who feared the Vodafone precedent would expose them to unforeseen tax liabilities.

“The Supreme Court has come with a thumping judgment,” said Vodafone lawyer Harish Salve. Analysts said the case had cast a chill on investor sentiment while the Indian government is eager to boost revenues to help balance its budget and pay for planned increases in spending on social programmes to ease poverty.

At least eight other companies are facing similar litigation, as India steps up tax collection efforts to help plug its growing fiscal deficit.

“This will improve investor sentiment tremendously,” said Mumbai lawyer Nishith Desai. “Rule of law is re-established.”

He said the verdict will hasten dealmaking which had stalled as companies awaited clarity on tax law. “We will see a lot of interest in India in terms of FDI [foreign direct investment] and outbound investment as well,” said Desai, who has done work for Vodafone.

The dispute centered on Vodafone’s $11bn acquisition of the Indian telecom assets of Hong Kong’s Hutchison Telecommunications in May 2007. Vodafone International Holdings – a Dutch subsidiary – acquired a 67 per cent stake in CGP Investments, a Cayman Islands company which held the Indian telecom assets of Hutchison. Vodafone said it did not owe tax on the deal because it took place between two foreign entities.

Yesterday’s ruling overturns a high court decision which found that the deal was taxable in India because it involved the indirect transfer of Indian assets, which accrue revenue in India.

The government said Voda-fone owed 112.2bn rupees (£1.44bn) in tax and interest, plus up to 100 per cent in penalties.

Vodafone said the Supreme Court’s decision absolved it of liability and the court would also refund, with 4 per cent interest, the 25bn rupee deposit it made on the potential tax bill in November 2010.

“We will continue to invest in the India business, particularly in rolling out 3G services to rural India,” said a spokesman.

AT&T, Cadbury, GE, SAB Miller, Sanofi, and Vedanta are among the companies fighting tax cases in India, said Sandeep Ladda, executive director at PricewaterhouseCoopers in India.

“This settles a prolonged litigation which had created a lot of uncertainty for multinationals,” he said. “This should provide much-needed respite to other litigants in other cases.”