Citizens' Issues
Vodafone tax verdict: Interpretation of existing laws

While 'Team Anna' member, Prashant Bhushan has launched a scathing criticism of the Vodafone verdict saying that India will be seen as a ‘banana republic’ where foreign companies can loot our resources, senior advocate Arvind Datar says in this case the demand was for capital gains tax which never arose in the country

While the Supreme Court has given its verdict in the Vodafone tax case, the issue of taxation, tax-avoidance and capital gains tax is still being discussed as a hot topic. Two senior lawyers have come out with different opinions on the verdict. Strengthening the Union government in its fight in the Vodafone tax verdict, ‘Team Anna’ member and Supreme Court advocate Prashant Bhushan has said that, “Our courts must send a clear signal that India is not a banana republic where foreign companies can be invited to loot our resources and even avoid paying taxes on their windfall gains from the sale of those resources.” On the other hand, Arvind P Datar, a senior advocate from Madras High Court, said, “In the Vodafone case the demand was for capital gains tax which never arose in India. Once the hollowness of the department’s claim was exposed, the absence of any liability became clear. The courts merely interpret the law and if a transaction is not liable to Indian income tax, one must graciously accept the result.”
In an article written in The Hindu ( ), Mr Bhushan had said, “Despite the fact that the entire object and purpose of the transaction between Hutch and Vodafone was to transfer the shares, assets and control of the Indian telecom company to Vodafone, the Supreme Court declared in January 2012 that the transaction has nothing to do with the transfer of any asset in India!”

Mr Datar, in a separate article written in the same newspaper ( ), said, “The demand for tax in the Vodafone case was a result of failing to understand the difference between the sale of shares in a company and the sale of assets of that company. Vodafone was the successful buyer of the share of the Cayman Island company for $11 billion. Consequently, by purchasing one share of the Cayman Island company, Vodafone came to own 51% of share capital of Hutchison Essar (HEL). The transfer of shares of one non-resident company (Hutchison) to another non-resident company (Vodafone) did not result in the transfer of any asset of HEL in India. All the telecom licences and assets continued to belong to HEL or its subsidiaries.”

“A large part of the income of the ‘Big 5' accountancy and consultancy firms derives from tax avoidance schemes which flourish in the name of tax planning. Their legality has agitated courts in India and abroad for a long time,” Mr Bhushan said.

He said, the Vodafone case is in the lineage of the Mauritius case in as much as both encourage tax avoidance devices ostensibly to attract foreign investment. “The 2G judgment of the Supreme Court cancelling 122 telecom licences granted four years earlier, in sharp contrast, enforces the constitutional principle of equality and non-arbitrariness. The proponents of FDI are groaning that this will stem the flow of investment. Honest foreign companies should not be deterred by this judgment, which strikes a blow against crony capitalism. But even if FDI becomes a casualty in the enforcement of the rule of law, so be it,” he added.

However, according to Mr Datar, if there is a policy decision to permit tax exemption for investments through Mauritius, one cannot blame the courts for any potential loss of revenue. “The government is fully conscious of the so-called loss of direct tax revenue but these incentives are essential to foreign direct investments. The huge growth in the telecom and other sectors has been substantially done through the Mauritius route. One cannot forget the enormous employment generated by FDI and the substantial increase in excise duty, sales tax and other duties and cesses. To merely harp on loss of income tax is not correct,” he said.

According to Mr Bhushan, in the Vodafone case, the Supreme Court has again made a wrong call on tax avoidance, setting a precedent that jeopardises thousands of crores of potential revenue for the exchequer. Mr Datar, however, feels that the courts merely interpret the law and if a transaction is not liable to Indian income tax, one must graciously accept the result.

Replying to Mr Datar’s article, the ‘Team Anna’ member said, “Tax avoidance devices have been honed to a fine art by clever lawyers and consultants advising such corporations. Unfortunately, in the Vodafone and the Mauritius cases, the court has winked at them instead of frowning upon and frustrating them as mandated by the binding judgment in McDowell.”




5 years ago

The bigger issue here is the corporate veil that seems to be covering not just large corporates in India but pretty much every facet of commerce in India now. Nothing wrong with that, but if everybody around us is blatantly not going to pay tax, then are we the idiots who did and continue to do so too? There needs to be some more research on the realities behind exemption from tax - after all, there are things called double tax avodance treaties and there can easily be a law that places tax liability in India if the body corporate hiding behind a tax haven does not pay tax anywhere.

Humbly submitted/VM


5 years ago

Datar is correct.

If the laws are flawed, the courts cannot be blamed.

To avoid such issues, the government should make sure that shell companies are not allowed to invest in Indian assets. Only companies with certain amount of operational revenues should be allowed to purchase assets in India.

There should be a minimum ratio between the revenues of the parent company and the assets that it purchases in India.

Such a law would ensure that overseas companies directly invest in India and not route the investment via tax havens.

Short rally possible: Friday Closing Report

Nifty should close above 5,400 over the next few days for the gains to continue

Better-than-expected response to the Greek bond swap deal led to a rally in the Asian markets, India included. Today’s gain on the Nifty almost wiped off the losses seen in the past three trading days. We had mentioned on Wednesday that the market may resume its uptrend if the Nifty closes above the resistance of 5,245 and 5,285. Today the index broke these levels at the beginning of the session itself. However, the benchmark should close above 5,400 over the next few days to maintain those gains. The National Stock Exchange (NSE) saw a volume of 70.47 crore shares.

Refreshed after a day’s holiday, the market opened on a firm note tracking positive global cues. The US markets closed higher overnight on hopes that Greece would be able to finalise a bond swap deal with its creditors in order to save itself from a default. The development also rubbed off on the Asian markets, which were in the positive in morning trade today. Back home, the Nifty opened 74 points up at 5,294 and the Sensex resumed trade at 17,326, a gain of 180 points over its close on Wednesday.

Across-the-board buying saw the indices in a buoyant mood. The momentum also resulted in all sectoral gauges trading higher. The market continued its northward journey in subsequent trade on strong institutional support.

However, lacklustre opening of the key European indices saw the local market paring some of its gains in post-noon trade to touch its intraday low. At the lows, the Nifty fell to 5,292 and the Sensex went down to 17,326.

The fall was temporary as the indices soon resumed their upmove taking the benchmarks to the day’s high around 3.00pm. At the day’s highs, the Nifty rose to 5,342 and the Sensex scaled 17,532.

The market snapped its three-session losing streak and closed higher on across-the-board buying support and news of better-than-expected support to the Greek bond swap offer. The Nifty closed 113 points (2.17%) higher at 5,334 and the Sensex jumped 358 points (2.09%) at 17,503.

The advance-decline ratio on the NSE was 1242:463.

Among the broader indices, the BSE Mid-cap index surged 2.16% and the BSE Small-cap index climbed 1.35%.

Barring the BSE Fast Moving Consumer Goods index (down 0.12%), all other sectoral gauges settled higher. They were led by BSE Metal (up 4.69%); BSE Capital Goods (up 3.75%); BSE Bankex (up 3.66%); BSE Consumer Durables (up 2.92%) and BSE Realty (up 2.73%).

Jindal Steel (up 6.83%); Tata Steel (up 6.74%); ICICI Bank (up 6.22%); Larsen & Toubro (up 5.27%) and Sterlite Industries (up 4.66%) were the top gainers on the Sensex. The main losers were Wipro (down 1.63%); ITC (down 0.74%); Infosys (down 0.69%); Hindustan Lever (down 0.59%) and GAIL India (down 0.34%).

The index toppers on the Nifty were Jindal Steel (up 8.05%); Tata Steel (up 7.50%); ICICI Bank (up 6.48%); IDFC (up 5.77%) and L&T (up 5.29%). The laggards were led by Wipro (down 2.22%); Reliance Power (down 1.84%); Infosys (down 0.95%); Siemens (up 0.87%) and ITC (down 0.81%).

Markets in Asia, with the exception of Straits Times, closed higher on hopes that Greece would reach an agreement with its creditors, easing worries of possible default. Meanwhile, China’s annual consumer inflation eased to a 20-month low of 3.2% in February while factory output growth slowed to its lowest level since July 2009.

The Shanghai Composite advanced 0.79%; the Hang Seng gained 0.89%; the Jakarta Composite rose 0.60%; the KLSE Composite added 0.04%; the Nikkei 225 surged 1.65%; the Seoul Composite climbed 0.88% and the Taiwan Weighted was up 0.39%. Bucking the trend, the Straits Times declined 0.24%. At the time of writing, the key European indices were mixed while the US stock futures were in the negative.

Back home, institutional investors—foreign as well as domestic—were net sellers in the equities segment on Wednesday. While foreign institutional investors pulled out funds worth Rs504.59 crore, domestic institutional investors withdrew Rs129.91 crores from the equities markets.

With its cash flow under stress, engineering and construction firm HCC today said its board has approved corporate debt restructuring proposal. The decision for CDR comes in the wake of Hindustan Construction Company failing to see expected cash flow primarily because of delays in outstanding payments, the company said. The stock gained 3.20% to close at Rs27.45% on the NSE.

Essar Oil (EOL) today said it has signed an agreement with Indraprastha Gas (IGL) to set up CNG dispensing facilities at the former’s petrol pumps in the national capital region. The agreement provides for EOL using IGL’s CNG pumping facilities at the outlets, the company said in a press statement here. Essar Oil surged 3.61% to close at Rs57.45 on the NSE.

INOX Leisure has raised its stake to 68.30% in Fame India after subscribing to a rights issue.  INOX had picked up 36.5% stake in Fame by acquiring 2.02 crore shares at Rs 44 per share. INOX settled at Rs48.20 on the NSE, up 0.42% over its previous close.


SEBI to bring changes in consent order norms soon

SEBI has decided to consider a revamp of its consent settlement procedure as under the current framework there is no consistency and any clear-cut uniformity in the way such cases are handled

Mumbai: Capital market regulator Securities and Exchange Board of India (SEBI) today said it will soon come out new norms for consent orders under which the regulator settles ongoing probe against the listed companies on payment of fine, reports PTI.

“It (the new consent order norm) may out in three weeks,” SEBI chairman U K Sinha told reporters here.

In consent settlement, in vogue since 2007, the entity facing probe is subjected to certain fees and restrictions without admission or denial of alleged irregularities and SEBI thereafter drops its charges and the investigations.

The system was introduced with a view to cutting down on its costs, time and efforts in taking up the enforcement actions. So far, the regulator has passed more than 1,000 consent orders,

Sources said SEBI has decided to consider a revamp of its consent settlement procedure as under the current framework there is no consistency and any clear-cut uniformity in the way such cases are handled.

Mr Sinha further said that SEBI could consider tweaking the threshold limit of 25% under the takeover code amid apprehensions that this could act as obstacle for merger and acquisition (M&A) activity in India.

“There is some kind of apprehension that the threshold limits will work as obstacles for M&A activity in India, but we are looking at this. If some concrete suggestions come out... We will consider,” he added.

In September 2011, Sebi notified new takeover rule under which an entity buying 25% stake in a listed firm will have to mandatorily make an open offer to buy an additional 26% shares from public.

The new norms mark an increase in the open offer size for public shareholders from 20% currently. Also the trigger for making such an offer has been raised from 15% under the existing regulations.


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