The FINANCIAL -- Vodafone Group PLC on Tuesday fought back against India's proposal to impose a
heavy retroactive tax on some international mergers, saying the measure
would violate the firm's legal rights under an investment treaty between
Netherlands and India.
Vodafone, which is contesting an Indian tax claim of more than $2 billion stemming from the deal it struck to enter India in 2007, said it took the first step toward initiating arbitration proceedings by serving a formal notice to the Indian government through its Dutch subsidiary.
According to Borsa Italiana - London Stock Exchange Group, last month, India proposed legislation that would allow it to tax transactions dating back to 1962 in which two foreign firms exchange an Indian asset. The measure would override a Supreme Court ruling in January that said Vodafone didn't have to pay capital gains taxes on its 2007 deal, in which its Dutch subsidiary acquired a majority stake in an Indian cellphone company from a Cayman-Islands subsidiary of Hong Kong's Hutchison Whampoa.
A chorus of critics has joined Vodafone in pushing back on India's retrospective tax proposal, which lawyers say would increase the costs and risks of many cross-border mergers involving Indian assets and give the government the power to make new claims on dozens of old deals.
In a statement Vodafone said the legislation, which is part of a broader budget package that is expected to be taken up by India's Parliament next month, is "a denial of justice and a breach of the Indian government's obligations" under its treaty with the Netherlands. The treaty requires India to accord fair and equitable treatment to investors and to not go back on previous assurances, the company said.
Officials at India's finance ministry didn't offer an immediate comment.
The Vodafone tax case has become a major flashpoint in India's relations with foreign companies, stoking concerns that the country's regulations are becoming increasingly uncertain and volatile and that foreign firms are becoming a frequent target for a cash-strapped government that needs to raise tax revenue. The government has promised to rein in a fiscal deficit that stood at 5.9% of gross domestic product on March 31.
Other tax proposals in the budget legislation are adding to foreign investors' anxiety, including one that would allow authorities to tax transactions they believe are structured with the intent of avoiding taxes. Many foreign investors are worried that would negate tax benefits for the many firms that route their investments through Mauritius, which has a tax treaty with India. Oil producer Cairn India Ltd. (532792.BY), which is majority-controlled by U.K. firms, is fighting a separate government proposal to increase by 80% the taxes it pays on production.
Mahesh Kumar, a lawyer at Nishith Desai Associates who specializes in international mergers, said India has relatively little experience dealing with arbitration proceedings, but will likely find itself in more such situations if it goes back on assurances it has given investors. "If the government is reneging on old promises and breaching legitimate expectations of investors, then definitely it will have to deal with these," Kumar said.
On a visit to India early this month, U.K. Chancellor of Exchequer George Osborne said the retrospective tax would damage India's investment climate. Earlier this month international trade groups representing some 250,000 companies, wrote to Indian Prime Minister Manmohan Singh, saying the proposal was "prompting a widespread reconsideration of the costs and benefits of investing in India."
Sanford C. Bernstein analyst Robin Bienenstock said international arbitration can be a "very long process" and said Vodafone's move Tuesday is more about "piling on the pressure" on India to withdraw the proposal.
For Vodafone, which paid $11 billion to enter India and has spent billions more on capital investment to build one of the country's largest wireless providers, the Indian tax fight has been a five-year odyssey in the courts.
If the retrospective tax is passed into law, Vodafone is expected to challenge its constitutionality in the Supreme Court--potentially starting another long legal battle.
In its statement, Vodafone said it has asked the Indian government "to abandon or suitably to amend the retrospective aspects of the proposed legislation as Vodafone would prefer to reach an amicable solution to this matter."