Indian High Court Rules In Favor Of Foreign Investors In High Profile Tax Case

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Mar. 1 – Thanks to the decision of the Indian Government to tax indirect transfers over the past few years, the flow of foreign investment into India has not been as smooth or as bountiful as it once was.

A notable case involves Vodafone and its purchase of assets from Hutchison Essar. This has lead to many mulit-national corporations (MNCs) to put their Indian investment plans on hold, as Vodafone’s purchase lead the Indian Tax authorities to issue a demand for US$2.6 billion in capital gains despite the fact that Vodafone was the purchaser. The matter is still ongoing despite Telecom Minister Kapil Sibal telling reporters that the Indian Government is “ready to collaborate and look at some of [Vodafone’s] concerns.”

In a similar matter, the Andhra Pradesh High Court pronounced a tax order on the widely debated “taxability of indirect transfers” in a similar matter with Sanofi Pasteur Holding SA. It concluded that the alienation of shares of the French company by a resident who is taxed in France is not taxable in India. It also granted tax treaty benefits to the French company. The High Court came to this decision based on the Supreme Court’s thoughts, whereby controlling interests in a company does not constitute a separate asset that is subject to Indian taxes in the Vodaphone case.

Those familiar with the Vodafone case suggest that India’s Finance Minister P. Chidambaram is willing to consider a deal to resolve the dispute and hopefully win back India’s reputation as a friendly destination for international investment. Mr. Chidambaram also provided further relief to investors by confirming that India would postpone a set of controversial new rules relating to tax avoidance claims on international deals.

This ruling and the attempts to clear up the debate between capital gains, outstanding Double Taxation Avoidance Agreements and the imposition of retroactive taxes should come as a breather to the global investor community. The ruling may finally pave the way for India to properly ready itself for the wave of foreign investment it has long been seeking to attract. If maintained, the tax position in India may become far more transparent in addition to being easier to both understand and rely upon.

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