Multinationals may take retro tax settlement offer

The MNCs stand to gain as govt has offered to waive interest and penalty; and a falling rupee will reduce payout by another 20%

Multinationals such as Vodafone, Shell and Cairn face hefty retrospective tax bills from the Indian government – and some of them are likely to take the offer of settlement made by the Indian government in the Budget today, top corporate lawyers said today.

The multinationals stand to gain due to two reasons: One, the Indian government has asked the companies to pay only the tax and has offered to withdraw the interest and penalty component. Second, with the Indian currency losing value against the US dollar and the British pound, the actual payout from the foreign firms would be lesser by another 20 per cent.

Citing an example, a tax lawyer said when Vodafone was slapped with a Rs 10,000 crore tax bill, the Indian currency was around Rs 80 to a pound but now the rupee has depreciated to Rs 100 to a pound which has bought its tax bill down. “For example, Vodafone's tax bill in British currency has come down from 1.25 billion pounds to around one billion pounds, “a tax lawyer – advising one of the MNCs – said, asking not to be quoted. An official Vodafone statement said they are "studying the proposal , while continuing to seek resolution of this matter through international arbitration."  The matter is currently under arbitration.

The company claimed it has always maintained that there was no tax to pay at the time it completed its acquisition of Hutchison's business in 2007. It asserted that this view was upheld unanimously by the Supreme Court of India in January 2012, and that Vodafone was the acquirer in the transaction and made no capital gain whatsoever. Given the clarity of the Indian law in force in 2007, there was no legal basis to withhold tax.

“These companies are likely to settle the cases not because they think the scheme is fair but because they are tired of litigation in India and want to go ahead with their lives,” said he.

In many cases, the amount of interest and penalty is now more than the tax amount itself. “This (offer) can help restore confidence of international investors and would be a serious statement of commitment to reduce litigation and conveying a message that we have a tax regime that “listens”. This will help us bury the ghost of retrospective amendments which have tarnished India’s image with global investors,” said Suresh Surana, founder of RSM Astute Consulting Group.

Vodafone is already engaged in arbitration with the government of India in the case of a taxation claim for a transaction the company completed in 2007, in which it bought out Hutchison's 67 per cent stake in its telecom joint venture in India for about $11 billion. As the deal was signed abroad, Hutchison did not pay any tax. The Indian income tax department later asked Vodafone to pay the tax. Vodafone moved the Supreme Court and won the case but the Indian government came out with a retrospective tax legislation which taxed all such transactions signed earlier.  After many of these MNCs including Shell, Cairn PLC were slapped with notices, they moved the courts. Shell later won a reprieve from the Bombay High Court.