Vodafone ruling will end uncertainty

The much awaited decision in the Vodafone case reaffirms the confidence of investors all across the globe in the Indian judiciary. Bringing a major relief to the foreign investors interested in participating in the India growth story, the judgment pronounced by Hon’ble Chief Justice of India S H Kapadia, Swatanter Kumar and K S Radhakrish-nan clears the air surrounding the Indian regulatory environment which may enhance the foreign direct investment inflows into India.

After five years of battling with the Indian revenue, Vodafone finally sighed relief with the Supreme Court (SC) clearly stating that offshore transactions between non-residents cannot be taxed in India. Here is a quick recap of what transpired in the past five years.

The SC order acknowledges the use of holding companies and investment structures by investors for commercial purpose and expresses that the use of these elements in international structures does not imply tax avoidance.

While, accepting that not all foreign direct investment which is routed through Mauritius originates from Mauritius, it comments on a raging controversy on the India-Mauritius treaty benefits. It reinforces that unless the Revenue authorities establish that Mauritius structure was interposed just before the disposal, merely to evade tax, investors having a tax residency certificate cannot be denied the benefits of the India-Mauritius treaty.

While echoing the concerns of the investor community, the SC order seems to be an attempt to marry economic and legal realities. The order definitely would improve the country’s image in the global environment. While, there are some filters in the SC order, it alleviates prevailing uncertainty.

The order concedes that unless the anti abuse provisions are incorporated in the law or limitation of benefits provisions are incorporated in the treaties, absent a specific provision, Revenue authorities cannot look through a transaction.

In the words of the SC, “Certainty and stability form the basic foundation of any fiscal system. Tax Policy certainty is crucial for taxpayers to make rational economic choices in the most efficient manner.”

The decision of the SC is a milestone development in the taxation of international transactions and on the judicial approach to tax avoidance. The judgement may end uncertainty for companies such as AT&T, Sanofi, GE, SABMiller and many others grappling a similar issue with the Indian revenue authorities. This case is, perhaps, the first in the world where the issue of taxation on indirect transfer of shares was being litigated before a country’s highest judicial forum. The principles emanating from this ruling could, therefore, have ramifications beyond India.

While the Indian revenue kitty loses Rs 11,000 crore, all is not lost for the Government. The issue of indirect transfers has come to the fore by this litigation and it may give an opportunity to Indian Government to pass the legislation and bring the DTC provision of taxing indirect transfers and general anti-avoidance provisions, well before its time.

Shweta Shah, senior tax professional, contributed to the article. (Views expressed are personal)