The telecom giant Vodafone Group won a tax arbitration case of a whopping Rs. 20,000 crores against India’s tax demand in the Permanent Court of Arbitration, The Hague, The Netherlands on Friday. To understand this news, let’s first understand a few terms.
In 2007, Vodafone Group’s Netherlands subsidiary purchased an Indian company Hutchison Essar Ltd. for USD 11.1 billion. But the transaction was not a simple one.
Vodafone got into an agreement with Hutchinson Telecommunication International Ltd (HTIL), Hong Kong to buy its subsidiary CGP Investment Holdings in Cayman Island, which in turn held 67% shares of this Indian company. Because this agreement did not take place in India, it was an offshore transaction. But the company which was bought in the transaction was Indian so the business dealing came into the purview of the Indian tax system.
The Indian government sued Vodafone for evading taxes and asked for Rs. 20,000 crores in taxes and interests. Vodafone contested India’s claim and initiated arbitration proceedings against India in the Permanent Court of Arbitration in 2014.
The Permanent Court of Arbitration, The Netherlands ruled that India has no tax claim over this business dealing by bringing in the Bilateral Investment Treaty between India and Netherlands which calls for fair and equitable treatment of foreign companies. The court also asked India to pay Rs. 85 crores to Vodafone (45 crores of tax already paid by Vodafone and court proceedings costs amounting to 40 crores). The Indian Government can appeal the ruling in the Singapore High Court.
GLOSSARY
- Arbitration: When people do not want to bring their case to a court, they try to settle via Alternate Dispute Resolution known as Arbitration. An arbitrator i.e. an unbiased mediator tries to settle the dispute. His decision is enforceable in the court if matter is taken there.
- Bilateral Investment Treaty (BIT): This is an agreement between two countries that sets up rules for doing business in each other’s countries.
- Fair and Equitable Treatment: BIT ensures that a foreign company will be treated fairly and in a non-discriminatory fashion as other domestic companies.
- Offshore transaction: A business dealing that takes place outside a country’s boundaries e.g. If an Indian national buys a company in England, it’s called Offshore transaction.
- Tax: Government needs money for various purposes including infrastructure, defence, paying government employees etc. Government levies taxes for this purpose. If you earn money in India, you have to pay tax (a person can be exempted if his earnings are below a certain amount). Corporate taxes are levied on the company’s earnings. All the transaction that take place in India are taxable under the Income Tax Act, 1961.
You can also visit us on our Instagram, LinkedIn, Twitter and Facebook Page for connecting with us and getting more fun and informative content.