Foreign investor sentiment has, of late, not been particularly upbeat towards India. The perceived unreasonableness and instability of the Indian tax regime is among the various reasons for this. Indeed, given the current account deficit and the state of the economy, the need for foreign investment cannot be overemphasised. In this backdrop, the Government’s offer for conciliation of the Vodafone tax dispute seems a welcome step.
The origins of the dispute lie in the Indian Revenue authorities’ attempt to tax the sale of shares in Hutchison’s overseas entity (which ultimately held the Indian telecom company) to Vodafone’s overseas entity, on the grounds that the transaction effectively involved the transfer of the underlying shares in an Indian entity. Vodafone challenged the Indian authorities’ jurisdiction to tax such a transaction, and eventually succeeded before the Supreme Court.
However, the law was amended retrospectively to tax such transactions involving indirect transfer of Indian assets, thereby effectively negating the ruling of the Supreme Court.
Pursuant to the amendment, Vodafone received a reminder from the tax authorities for payment of the amount due. Vodafone, in the meantime, made an offer for conciliation under the United Nations Commission on International Trade Law. The Cabinet Committee on Economic Affairs recently debated the issue and authorised the Finance Ministry to make a counter-offer for conciliation under the Indian Arbitration and Conciliation Act, thus possibly opening a new chapter in the country’s history of tax dispute resolution.
Conciliation is a mechanism for friendly resolution of disputes through extra-judicial means. Normally, while mere participation in a conciliation process does not bind either party, any mutually acceptable solution reached could become binding upon both parties on signing the agreement. It must be noted that Indian tax law currently does not empower the Government to offer conciliation or participate in a conciliation proceeding, leave alone enter an agreement based on such proceedings. The Finance Minister has clarified that “If both sides, that is Vodafone and the Government represented by the Cabinet, agree on the outcome of the non-binding conciliation, then the matter will be taken to Parliament by way of amendment to the Income-tax Act”.
If Vodafone were to accept the Government’s offer for conciliation and a settlement is reached, it would be a path-breaking effort. A framework for such settlement of tax disputes, though virtually non-existent in India, is not unusual in the international context and various countries have a well laid-out process.
As currently there is no legal framework in India for resolving tax disputes through conciliation (though there is one known precedent of the Government entering an agreement with ITC for dispute settlement under the excise law), the exact modalities of the conciliation process in the present case remain to be seen. If Vodafone accepts the Government’s offer, it would be followed by the appointment of conciliators, who would attempt to find an amicable solution; and if the outcome is acceptable to both the Cabinet and the Board of Vodafone, it could require the Parliament to make necessary amendments to the law and, ultimately, the President’s assent (who ironically was the Finance Minister when the controversial retrospective amendments were introduced). Needless to say, the entire process calls for significant political will. While the Government has not indicated any timelines for the process, any delay will prolong the uncertainty, especially in view of the elections due next year.
It remains to be seen whether the conciliation process would be restricted only to the tax dispute with Vodafone or it would also apply to other taxpayers similarly impacted by the retrospective amendment. If restricted to Vodafone, other taxpayers are likely to challenge it as discriminatory (though one may seek to distinguish Vodafone’s case on the basis that it already had a favourable Supreme Court ruling).
A successful conciliation could indeed be a win-win for both sides. It could help restore confidence in the investment climate. Again, depending on how the amendment is carried out, it remains to be seen whether an alternative tax dispute resolution mechanism can emerge.
One of the grievances of foreign investors is the looming uncertainty and painful, lengthy litigation under India’s tax laws.
An alternative mechanism for quick and amicable resolution of tax disputes may go a long way in reducing litigation and nurturing an environment of greater certainty, stability, trust and friendliness in India’s tax regime.
The author is Tax Partner, Ernst & Young