In the blitzkrieg between Vodafone and the Government, the Government’s revelation that Vodafone was made aware by it, much before the transaction, of the obligation to deduct TDS on payments to Hutchison, has sent shock-waves amongst Vodafone’s supporters. The sympathy that Vodafone garnered from its’ carefully orchestrated plea that it was an innocent buyer which got caught in the crossfire stands eroded says the author.
The battle between Vodafone and the Government is as interesting off the field as it was on the field. After Vodafone lost two times before the High Court, everyone was complacent that its appeal would be thrown out by the Supreme Court. After all, how can you make billions of dollars of profit from Indian operations and claim that you are not liable to pay any tax in India only because you routed your investments through a paper company in the Cayman Islands? However, Lord Denning rightly said that litigation is a game of chance and the Supreme Court shocked everyone by deciding in favour of Vodafone. You must “look at” and not ‘look through” the transaction, the Court thundered, sinking the hopes of everyone in the Finance Ministry who was salivating at the prospect of Rs. 12000 crores in the kitty.
Vodafone and its supporters have been trying all tricks of the trade to try to cajole/ persuade/ threaten/ scare the Government to abandon the proposal to retrospectively amend the law. To its credit, the Government has held its ground so far despite the onslaught of criticism from all fronts
The verdict met with strong reactions. Legal crusader Prashant Bhushan, who single handed brought the marauding telecom companies to book and is well known for his frank and outspoken views, was at the forefront of the attack. He couldn’t hide his disappointment with the verdict calling it a “welcoming wink” towards tax evasion devices. He said courts had to send out a “clear signal” that India was not a “banana republic” where foreigners could come and loot its resources without paying taxes.
After Prashant Bhushan’s spirited attack of the verdict, Vodafone’s supporters would have known that their days of euphoria would be short-lived. Here, one must give credit to the Government for its fast reflexes (whether one agrees with the Government action or not is a different issue). Inspired by the criticism of the verdict and determined not to let the golden goose out of its grasp, the Government hastily came out of mourning and “smuggled in” a retrospective amendment to the law which, if enacted, will nullify the verdict of the apex Court.
Since then, Vodafone and its supporters have been trying all tricks of the trade to try to cajole/ persuade/ threaten/ scare the Government to abandon the proposal to retrospectively amend the law. They got Gordon Brown, the Prime Minister of UK, to say that the proposal was causing “significant concern and uncertainty” amongst overseas investors. They also marshaled US Treasury Secretary Timothy Geithner to say that the proposal had “dampened enthusiasm about India’s investment climate“.
Vodafone also found support amongst the legal fraternity with eminent senior counsel like Soli Dastur and Dinesh Vyas speaking out against the proposed amendments. While Soli Dastur described the proposals as “really unjust and contrary to all principles of equity”, Dinesh Vyas called it a “failure of national governance standards“.
This revelation has caused much disconcertment in the camp of Vodafone’s supporters who were thus far sympathetic to Vodafone’s cause because Vodafone had been cleverly projecting itself as an “innocent bystander” who happened to buy an offshore business and got caught in the crossfire of Indian law
To its credit, the Government has held its ground so far despite the onslaught of criticism from all fronts. Ex CBDT Chief Sudhir Chandra rushed to the Government’s defense by sending out a powerful emotive appeal that permitting billionaires like Vodafone to escape without paying tax would wreck the Indian economy and that common folk like you and me would have to bear the burden of this blunder. The Government also sent out an official press release that “Indian tax laws are very clear that the companies making capital gains from the assets located in India will have to pay taxes either in the country of their origin or in India” and that “It is not a case of double taxation but ensuring that companies that are liable to pay tax must pay some tax“.
But the biggest trump card in the Government’s favour has come in the form of a revelation by R. S. Gujral, the Finance Secretary, that Vodafone had been warned as early as on 23rd March 2007 (before the transaction took place) that the transaction was taxable and that Vodafone ought to deduct tax thereon when it made payment to Hutchison. Business Standard testified that it had seen the “official letters” exchanged between the income-tax department and Vodafone.
This revelation has caused much disconcertment in the camp of Vodafone’s supporters who were thus far sympathetic to Vodafone’s cause because Vodafone had been cleverly projecting itself as an “innocent bystander” who happened to buy an offshore business and got caught in the crossfire of Indian law.
With the revelation that Vodafone was forewarned by the Government and still decided to be a “dare devil” by not deducting tax at source, much of that sympathy is beginning to wear thin. The Hindu Business Line lashed out at Vodafone saying it had “guilt-tripped“, was “inconsistent” and had “tied itself up in knots” on its defense strategy. Firstpost.com was also contemptuous, calling Vodafone “too clever by half” over its strategy of invoking the India-Netherlands DTAA.
A wise judge once said “If you play with fire, you must not complain of burnt fingers”
Anyway, so, what now? If the retrospective amendments go through Parliament (as they will because no political party wants to be seen as pro-MNC and anti-common man), the battle ground will shift once again to the Courts. The Government will probably file a petition asking the Court to “review” its verdict while Vodafone will probably file a writ petition (directly in the Supreme Court?) to challenge the validity of the amendments. Will this / should this happen during the tenure of the present Chief Justice (he retires in September 2012) is a dimension that both sides are probably factoring in.
Till then, brace yourself for an exciting journey ahead.
Vellalapatti Swaminathan Iyer