Vodafone Tax Dispute & the Use of Retrospective Legislation

As per press reports, the Attorney General of India, Shri Goolam E Vahanvati, has recently stated in a single-page opinion sent last week to the law ministry, that Vodafone could be taxed for its 2007 deal, as a result of the controversial amendments in laws introduced earlier this year allowing the government to tax past transactions. Just a few days ago on 6 Aug 2012, the Finance Minister, Mr. P Chidambaram, had announced a review of retrospective tax rules to “find reasonable and fair solutions to pending and likely tax disputes". It is unclear now as to what the Government's next move would likely be.

In 2007, Vodafone acquired 67% stake in Hutchison's Indian operations for over $11 billion USD. The deal was carried out through overseas subsidiaries of both the companies. By doing so, the companies were able to bypass Indian tax laws. The Government had earlier tried to tax Vodafone but it lost a legal battle against Vodafone in the Supreme Court of India. Not being satisfied with the outcome, the Government then altered tax laws through the Finance Act, 2012. Clause 119 of the Finance Act, 2012 states that -

"Notwithstanding anything contained in any judgment, decree or order of any Court or Tribunal or any authority, all notices sent or purporting to have been sent, or taxes levied, demanded, assessed, imposed, collected or recovered or purporting to have been levied, demanded, assessed, imposed, collected or recovered under the provisions of Income-tax Act, 1961 (43 of 1961), in respect of income accruing or arising through or from the transfer of a capital asset situate in India in consequence of the transfer of a share or shares of a company registered or incorporated outside India or in consequence of an agreement, or otherwise, outside India, shall be deemed to have been validly made, and the notice, levy, demand, assessment, imposition, collection or recovery of tax shall be valid and shall be deemed always to have been valid and shall not be called in question on the ground that the tax was not chargeable or any ground including that it is a tax on capital gains arising out of transactions which have taken place outside India, and accordingly, any tax levied, demanded, assessed, imposed or deposited before the commencement of this Act and chargeable for a period prior to such commencement but not collected or recovered before such commencement, may be collected or recovered and appropriated in accordance with the provisions of the Income-tax Act, 1961 as amended by this Act, and the rules made thereunder and there shall be no liability or obligation to make any refund whatsoever."

      

The big question here is that if such retrospective legislation is constitutional in nature? While it is necessary to safeguard the interests of the nation, is it really justifiable to use retrospective legislation to do so? The Government seems to have its eyes set on Rs. 11,218 crore, which it seeks to avail from this deal. However, if this does happen, then because of this and the 2G scam incident, in addition to the current economic situation, foreign investors may soon be deterred away from investing and doing business in India, which would have a severe impact in the long run. What the Government's next move might be is anyone's guess. However, if the Government does decide to use the new law, then it will also be really interesting to see what the Supreme Court's stance would be on this legislation, and on such retrospective legislations in general.