Vodafone is a misunderstood case

"The demand for tax in the Vodafone case was a result of failing to understand the difference between the sale of shares in a company and the sale of assets of that company."

The demand for tax in the Vodafone case was a result of failing to understand the difference between the sale of shares in a company and the sale of assets of that company. It is an elementary principle of company law that ownership of shares in a company does not mean ownership of the assets of the company. The Hindu : Opinion / Op-Ed : Vodafone is a misunderstood case

The shares owned by Hutchison were sold to Vodafone indirectly purchasing 51 per cent of the share capital of Hutchison Essar Ltd., a company registered in Mumbai. Not a single asset of this Mumbai based company was transferred either in India or abroad. Indeed, there would be no transfer of any asset in India.

Prashant Bhushan responds:
The stated purpose of the sale purchase agreement between Hutch and Vodafone was to transfer the shares, assets and control of the Indian Telecom Company HEL, but they claim to have achieved this by transferring a single share of a Cayman Island-based holding company. This "device" of using the transfer of the Cayman Island company in the bid to avoid Capital Gains tax is clearly a tax avoidance device.

The Hindu : Opinion / Op-Ed : Prashant Bhushan responds: "Tax avoidance devices have been honed to a fine art by clever lawyers and consultants advising such corporations. Unfortunately, in the Vodafone and the Mauritius cases, the court has winked at them instead of frowning upon"

Capital gains, everyone else loses

"In the Vodafone case, the Supreme Court has again made a wrong call on tax avoidance, setting a precedent that jeopardises thousands of crores of potential revenue for the exchequer."

The Hindu : Opinion / Lead : Capital gains, everyone else loses: Tax avoidance through artificial devices — holding companies, subsidiaries, treaty shopping and selling valuable properties indirectly by entering into a maze of framework agreements — has become a very lucrative industry today. A large part of the income of the ‘Big 5' accountancy and consultancy firms derives from tax avoidance schemes which flourish in the name of tax planning.

Many foreign institutional investors (FII) avoided paying taxes citing the Double Taxation Treaty with Mauritius. This treaty says a company will be taxed only in the country where it is domiciled. All these FIIs, though based in other countries and operating exclusively in India, claimed Mauritian domicile by virtue of being registered there under the Mauritius Offshore Business Activities Act (MOBA). Since there was no capital gains tax in Mauritius, most FIIs and most of the foreign investment in India, by 2000, came to be routed through Mauritius.

High Court rejected Vodafone's contention that the transaction with Hutchinson was not liable to tax. But in appeal, a Supreme Court bench headed by Chief Justice accepted Vodafone's claim. With such welcoming winks towards tax avoidance devices, it is unlikely that any foreign company would be called upon to pay tax or at least capital gains tax in future in India. Thousands of crores of tax revenue, and the future attitude of the courts towards innovative tax avoidance devices, will be shaped by these two judgments.

Our courts must send a clear signal that India is not a banana republic where foreign companies can be invited to loot our resources and even avoid paying taxes on their windfall gains from the sale of those resources.