Vodafone Tax Case Sets Landmark Precedent

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Sept. 13 – The Mumbai High Court ruling on the Vodafone case is expected to set a landmark precedent for cross-border deals in the country.

It marks the first time that an Indian court has ruled in favor of tax authorities, allowing them to charge a foreign company capital gains tax for a transaction that happened outside India. Vodafone will now be liable to pay capital gains tax worth an estimated US$2.6 billion for buying a  controlling stake in local mobile phone company, Hutchison Essar.

In 2007, Vodafone bought a 67 percent controlling stake in Hutchison Essar, paying US$11 billion to  a Cayman Islands entity managed by the seller, Hutchison Whampoa.

The Vodafone case will set an example on how authorities will handle similar offshore merger and acquisition deals involving companies where the operating assets are found in the country. More importantly, there is a chance it might deter foreign investors from proceeding with their plans in India.

The U.K-based telecommunications firm is considering submitting an appeal against the Mumbai High Court verdict to the Supreme Court in New Delhi.

Vodafone global tax executive Des Webb said it would take the Indian tax department “eight weeks before they pass any order or demand for tax.”

He added: “We need to consider our options. We have to look at the judgment in detail, we will be discussing it with our advisers . . . but we are seriously considering to make an appeal to the Supreme Court.”