India has courted international controversy by backdating reform in a law to ensure that Vodafone will owe tax on its purchase of its mobile phone network in that country.
As the New York Daily News reports:
India vowed Tuesday to push ahead with controversial legislation allowing it to retroactively tax such companies as British mobile phone giant Vodafone over cross-border business deals.
The measure, which has stirred huge protests abroad from foreign investors, would oblige overseas firms to pay tax on transactions involving Indian assets routed through tax havens.
"India cannot become a no-tax country... a tax haven" to lure international investors, finance minister Pranab Mukherjee told parliament.
The amendment to India's Income Tax Act would bypass a Supreme Court ruling dismissing a $2.2-billion tax bill imposed on Vodafone over its takeover of Hong Kong-based Hutchison Whampoa's Indian cellular unit in 2007.
Mukherjee did not mention Vodafone by name but said "either you pay tax here or in your own country."
"There cannot be a situation where a somebody will make money on an asset located in India and will not pay tax either in India or the country of its origin," he told lawmakers.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
In theory, your ideas are good. In practice, how can a business be run if it is not sure about profit, loss and tax applicable?
India made the mistake of having a tax loophole. Vodafone exploited this loophole. India can tax learn from its mistake and close the tax loophole for future transactions. I think it is unjust for India to tax retrospectively.
India is taxing retrospectively for last 7 years. Now, why not 8 years or 6 years?
I am not against paying taxes. But, retrospective taxes are unjust. Just because Vodafone is smart to use a tax loophole does not give India the right to pass unjust laws.
Businesses are OK with high taxes as long as they are stable and changes predictable. Business can price the goods accordingly in that country or decide not to invest in that country.
I am an Indian. You are not an India. Yet, I think that India is treating Vodafone unfairly.
a) All business is about uncertainty – profit and loss is unknown and soi candidly is tax or we would not need to interpret them. Your claim makes no sense in that context.
b) India does not think it made a mistake – it thinks its court did, and I agree
c) Tax avoidance is exploitation and is India is saying no – and good for it for doing so
d) I agree I am not in India. I am applauding the principle
How can India justify retrospective tax from last 7 years? Why not 6 or 8 years?
If I have a business in India and India can tax retrospectively, how do I price my goods or services? I want to ensure profit for myself after paying taxes 7 years in future should the Indian government decide to tax retrospectively.
India is right in taxing future similar transactions. India is wrong in taxing retrospectively.
As a business in India, if I know that these transactions will be taxed from now onwards, I will price them accordingly. Retrospective changes in tax laws is theft by government. Just because government can laws, the act may be legal but it is immoral and unfair.
The market supposedly prices your goods and services
Not tax
Please use your economic theory correctly
If you are a market price giver then you have monopoly power
That is an issue the Indian government should also address in that case
It is obvious that India believes the court make a mistake – so does every other litigant who loses their case.
It still doesn’t justify abusing the rule of law. When the state overturns a specific court decision it doesn’t appreciate by retroactively amending legislation then civil society suffers the consequences.
Should India go ahead and introduce this retroactive legislation (which I doubt – this is just drum-beating) then they can anticipate a challenge on constitutional grounds which (given the governments challenge to the judiciary) will likely go against them.
I think it is civil society being protected by the government here
It is not a tax on Vodafone’s profits, but a tax on the seller’s “gain” that Vodafone was not obliged to withhold from its payment to the seller at the time, because as the Supreme Court has ruled, there was no such liability under the law as it was then enacted. To come up with a new law that retrospectively taxes Vodafone instead of Hutchison Essar is just plain absurd.
So say you as a lawyer
India begs to differ
Whatever the Indian government’s motivations, the money raised will help provide hospitals and schools for some of the poorest people on the planet. If the alternative is to allow some of the nastiest to keep their ill-gotten gains most people won’t need to think too hard to work out whom to back.
So as long as the money is used for a good purpose, stealing is ok?
This is not theft
It’s an act of parliament
How can the market determine prices, if the producers don’t know the exact cost? If producers are not sure about retrospective taxes to be incurred in future on current goods/services, then how can the market price be correct?
Why don’t you answer my question about 7 years of retrospective taxes and not 6 or 8 years? It is obviously a random number. A tax law using random numbers can never be just.
Have you ever run any own business or managed any business at a senior level? I run my own business and I don’t know how to price my services without knowing how much taxes I have to pay for them.
I assure you I have run numerous businesses – always at senior level
I was senior partner of a firm of accounts for 15 or so years
And price is not, and never should be, I assure you, determined by cost
Cost may say the price means you shouldn’t do something – but you will fail if you set price by cost
Why don’t you answer my question about 7 years of retrospective taxes and not 6 or 8 years? It is obviously a random number. A tax law using random numbers can never be fair.
I have been running one same business successfully and profitable for many years. You ran numerous businesses! What happened? All of them failed because your product prices had relation to their cost?
Your question is meaningless – and so irrelevant
My career moved on – and so did the businesses – almost all of which still exist, successfully
That’s the nature of being entrepreneurial – you move on
It is disengenous to suggest that there is a similarity between Barclays and the proposed Indian retroactive legislation. There are simply no parallels at all.
Ah, so the UK’s retrospection to correct a clear defect in the law is different from India’s retrospection to correct a previously unknown defect in the law.
Yes, I can see that’s very different, when viewed through colonial eyes
That really is a strange response to a serious issue. There is nothing colonial about the matter – just look at the facts:
1. India is planning to change the law to effectively overturn a decided court case it lost. The Barclay matter has not been before court and therefore the Treasury is not seeking to usurp a decision given by the highest court in the land.
2. In Barclay’s, the amendment to the law is retroactive by 3 months. In Vodafone the intended law is to be retroactive for more than 40 years.
3. The retroactive law arising from Barclay’s was a direct result from an agreement concluded between the government and Barclays( The Code of Practice on Taxation for Banks – banks that signed up to the Code agreed to cease any artificial tax avoidance activities). No need to mention why India is seeking to amend the law retroactively.
4. The court in Vodafone (all 3 judges unanimously) ruled that the transaction in question wasn’t an artificial tax avoidance activity. Furthermore, the High Court (that ruled in favour of the State) also held that there was neither artificiality nor was there any tax avoidance. In Barclays, it was the opinion of HMRC (under the Code) that the transactions entered into were highly artificial with little or commercial substance.
So sorry, there are no parallels – but feel free to elucidate if you can.
You mean structuring a deal through Cayman which has no economic connection with the arrangement is not artificial?
You are, like most who support tax haven abuse, living a delusion if you think that true
“It is a common practice in international law, which is the basis of international taxation, for foreign investors to invest in Indian companies through an interposed foreign holding or operating company, such as Cayman Islands or Mauritius based company for both tax and business purposes.”
Not my words but those of the majority judgement in the Supreme Court and further substantiated by government documents placed before the court.
The deal was not, as you put it, structured through the Caymans – it was in fact the share sale of a Cayman Island investment holding company that indirectly held (through 12 levels of subsidiaries) 52% of Hutchison Essar.
The Cayman company has been part of the Hutchison Telecom global structure since 1998 (sale was concluded in 2006) and the court concluded that it had both commercial and business substance.
Therefore your assertion that the Cayman company had no economic attachment with the transaction is quite clearly wrong – it was the subject matter of the sale – how much more attachment do you require?
It was a tax avoidance arrangement
There was no substance to it, in my opinion
And that of any non tax lawyer
There is a very interesting contrast to the Indian approach to unfavourable court decisions. See the South African governments response to a defeat in a recent tax case: http://www.treasury.gov.za/comm_media/press/2012/2012050901.pdf
Let us take a psuedo-example. Let us say the cost to manufacture a good is $100. Now at what price should this good be sold? I would close the business, if I cannot sell the good above $100. I would consider investing much more, if the sell price is above $200.
Richard says that selling price has no relation to the manufacturing price. So prices of all commodities can change; prices of labour can change; tax laws can change; and all these have no impact on the selling price.
Even a person, who has never studied economics, by just using common-sense, would laugh at Richard’s argument: “And price is not, and never should be, I assure you, determined by cost”.
I’m sorry – anyone who has read market economics would laugh at your assertion
You’re very clearly not a profit maximiser, or anywhere near it!
But that’s your choice
But before lecturing on market economics it may be worth your while reading it
How can anyone maximize the profits, if he/she is not sure about the cost? Retrospective tax law changes impacts the cost of goods/services.
Richard, you deserve a nobel prize in economics. You, like Paul Krugman, can talk about economics for hours, without having an understanding of fundamentals.
Well let’s be clear – tax is not a cost
It’s a distribution out of profit
You are kind of confused about this, aren’t you?
Although I agree with you Richard in principal and in practice. But have you thought of a reverse situation. What if an offshore location which had no tax on profits, realized the error of its ways and changed the law to retrospectively tax all the profits made by entities residing in its jurisdiction? All entities or individuals are now to be taxed at 35% on worldwide income. Wouldn’t this be exactly what India is doing?
Except India always had a law that it thought did this – i/.e. Vodafone were on notice, just as Barclays were in the UK
Income tax is not a cost. India has excise tax or consumption tax. This tax is a small percentage of total sale price. India demands the price should be printed on every good and this printed price include all taxes.
Excise tax or consumption tax is a cost for every business.
Er, no it isn’t.
You charge it to the customer
Yes, now we agree. I can charge it to the customer only if I know the tax. If India charges tax retrospectively, how can recover the charge from my customers? Millions of products are sold by companies in one day. Many customers pay in cash. There are no personal details of these customers.
Levying a tax is Ok. Levying a tax retrospectively, which businesses cannot pass to their customers, is unfair.
You don’t ever pass a capital gain on sale of a business on to a customer
That’s what the Vodafone dispute is about
Please stick to the facts and stop putting forward nonsense
Only if the customer will pay that price. If the customer will not, then the business must absorb the tax itself in the form of reduced margin. I think this is the nub of gs’s issue, really. Demand pricing is fine as far as it goes, but if consumption taxes raise the price of the goods so much that demand for them falls, business must cut the before-tax price in order to maintain sales. If that new price is lower than the cost of production then the business must cut production costs – if it can – or go out of business. Retrospective taxation gives business no opportunity to adjust its price and cost base to accommodate the tax increase within the price range acceptable to customers. And a government that taxes retrospectively once cannot be trusted not do so again. Businesses can therefore have no confidence in their pricing or their cost base.
You are confusing indirect taxes and direct taxes
The Vodafone case is on direct taxes – on profits, a residual after activity has taken place
That’s fundamentally different from indirect taxes charged on a transaction as it occurs irrespective of the profit element within it
We need to get our apples and oranges right in this debate – and the conclusions being reached are wrong because they’re being confused
No, Richard, I am not confusing direct and indirect taxes. It does not matter whether the tax in question is a consumption tax applied to the final price of consumer goods or a transaction tax applied to the purchase price of a business. If the tax authority applies a tax retrospectively to a transaction that was free of tax at the time it was done, the business has unwittingly mispriced the transaction and has no opportunity to correct the price. This destroys business trust in government: a government that can apply taxes retrospectively once can do it again. Businesses cannot price goods or transactions if they do not know what taxes will be applied to those goods or transactions.
I’m sorry – on this occasion that’s just wrong
A tax on profit can’t change pricing
It is only a tax on profit because it is retrospective. As gs explained in the comment below, if it had been applied at the time it WOULD have affected the price and maybe the deal would not have been done at all. As it is retrospective the deal has already been done, the price has already been paid and the hit is to profits.
Again – you ignore market economics
Why?
On the contrary. Under normal circumstances the price, and therefore the viability, of the deal would be affected by tax payable on the transaction. That’s market economics. But if taxes are applied retrospectively, the deal has already been done and the price is fixed, so the company takes the hit on profits – whereas had the tax been applied AT THE TIME it might have demanded a lower price (since this is a tax on purchase) or not done the deal at all. I am also concerned about the effect on market pricing of simply not knowing whether taxes might be applied at some point in the future. I would expect companies might try to raise their prices somewhat to cover them for this uncertainty. Or move their business in a country where they don’t do retrospective taxation, of course.
I don’t think we’re going to agree on this
But you clearly assume all people are price makers, not takers
And I’m not sure why
Richard says, “You don’t ever pass a capital gain on sale of a business on to a customer.”
If I think of buying a business, I consider the value of that business plus the taxes that I have to pay for that business. Based on both these factors, I quote a price. The seller too considers the same 2 factors, before making the sell.
In case of Vodafone – Hutch deal, Vodafone realized that under the then current Indian laws, buying Hutch does not impose any tax in India. So Vodafone and Hutch agreed on a price and the sale was made. Then, Indian government changed the tax laws RETROSPECTIVELY. Now, Vodafone would have to pay tax on its purchase of Hutch business.
Had Vodafone known about this tax, at the time of purchasing Hutch, maybe Vodafone would have quoted a different price for Hutch or maybe Vodafone would not have bought Hutch.
Vodafone does not have to pay any tax under the tax laws in place at the time Vodafone bought Hutch. The Supreme court of India has validated this argument. Now, Indian government is retrospectively changing the tax laws for an arbitary period of 7 years, so that Vodafone pays tax.
My point is imposing new taxes for future transactions is OK. Imposing taxes retrospectively is unfair to businesses.
The law existed
Vodafone tried to get round it
They’re failinmg
That’s what really happened
Again, please stick to the facts
Wrong – no law existed to tax the transaction. If you took the trouble to read the judgements you will see that the judges were unanimous in deciding that no such law existed and furthermore they dispensed with the notion that the intention of the particular section of the act was to tax such as a transaction. Not even a purposive interpretation could have assisted the revenue without rendering the main part of the section nugatory.
The facts are in the judgements.
And I beg to differ
As you are perfectly entintled to – it is your blog. And I respect your right to disagree.
However, it would have been illuminating to all who read your blog had you actually offered a measured reasoning for your dissention based not only on the facts of the case but also a critical assessment of the judgement delivered by not only the highest court in India but also the most senior judge in India.
Sadly, in relation to this case, we do not seem to have come across one solitary discussion which has presented an analytical criticism, apart from oft trotted populist lines from a well worn crip sheet.
Not even the Indian government have presented reasons for disagreeing with the judgement apart from asserting a right to tax solely on the grounds…..that nobody else has taxed the transaction. Limp!
I have written my reply in the Indian press
I haven’t time to find the link…