There are some recent developments in Vodafone's take over of Hutch case. Lets understand the entire case in this thread today
To enter a new market for any foreign company,there are 2 ways. One, by opening offices,raising infrastructure and maintaining branches etc. Two, by acquiring already established business/company. Vodafone (dutch company) took the 2nd route to get into telecom business in India
But rather than buying Hutchison Essar Company that was operating in India, they bought the parent company CGP which was registered in tax heaven country holding 66% of share in Hutchison Essar Company via various companies.
In India, if you sale a Capital Asset, you have to pay capital gain tax on the profit you made after making adjustments like cost inflation and the cost of improvement etc. Shares are capital asset. Indian Taxmen asked for tax on this transaction as Indian Company was being sold
But the definition of Capital Asset at that time did not cover such a transaction. Case went to Bombay HC where Indian Tax Authorities won the case on the ground that it was a prima facie case of Indian Company being sold, no matter how the transaction is conducted.
Vodafone moved to Supreme Court. Supreme Court went by the literal definition and said this is a transaction of sale of a foreign company to a foreign company and India Tax Authorities cant collect tax on it. PS the amount of tax is rought 20K crore.
UPA Govt was in power and it amended the definition of Capital Assets RETROSPECTIVELY to include a transaction of this nature where any foreign company who derives its value from Indian Asset, if sold, such gain will be taxed in India.
Vodafone then initiated arbitration in 2014 invoking the Bilateral Investment Treaty signed between India and the Netherlands in 1995. This BIT was signed BIT for promotion and protection of investment by companies of each country in the other’s jurisdiction.
Yesterday Permanent Court of Arbitration (PCA) at Hague ruled that India’s retrospective imposition of a tax liability, interest and penalties on Vodafone Group for a 2007 deal was violation of the Bilateral Investment Treaty with Netherlands
PCA said that it is against arbitration rules of UnitedNationsCommission on InternationalTradeLaw as well. This was a unanimous decision meaning that India's appointed arbitrator also ruled in favour of Vodafone. India has option to move to SingaporeInternationalArbitrationCentre
India is not first country to amend a tax law retrospectively to tax a company who exploited a loop hole in the tax regime. US, UK, Canada, Belgium, Italy and even Netherland itself have retrospectively amended tax laws in past
India is entangled in more than a dozen such cases against companies over retrospective tax claims and cancellation of contracts. The exchequer could end up paying billions of dollars in damages if it loses.
To reduce future arbitration claims, India has ended such bilateral investment agreements with over 50 countries. India is now working on a new law to protect foreign investors by offering relief from possible policy changes even as it upholds the right to tax them.