Tax Dilemma over Vodafone-Hutchinson transaction-Part I

The facts:

• Netherlands based Vodafone purchased a controlling stake in Hutchinson Essar,an Indian company. The sale price of $11billion was paid to Hutchinson, a Hongkong conglomerate.
• The acquiring company paid the full amount to the selling company without witholding any capital gains tax that according to the Income Tax authorities in India should have been witheld and paid to the Government.

Amount Involved:

• The capital gains tax would be around $2billion on the $11 billion sale.

Government's viewpoint:

1. The acquiring company, in this case Vodafone, should have witheld capital gains tax on the transaction. The logic? Because the 'capital asset' is on Indian land i.e Hutchinson Essar, has operating assets in India.
2. The 2008 budget proposed an amendment in Indian Tax laws that would strengthen its case in such situations. This amendment has yet to be enacted and will be debated when the Indian Parliament starts its next session on April 15th. The likelihood that this proposed change in the Indian Tax Law will be passed without opposition is extremely high.

Vodafone's viewpoint:

• The transfer of shares took place outside India and therefore the taxability of such a transaction is outside Indian jurisdiction.

Implications:

• This has big implications for the future of M&A's to thrive in India. India is just emerging as a big player in the M&A world. This is evidenced by the possible, maybe even imminent Tata Motors take over of Jaguar for an estimated $2bill, Tata Steel's 6.7 billion pounds takover of dutch rival Corus etc. Taxing capital gains on such transactions would not be regarded as very positive and encouraging signal.

Big Dates:

• April 15th- Parliamet resumes its session and will consider enacting the proposed changes to the Indian Tax laws relevant to this case.
• June 23rd- Date on which Bombay High Court will resume hearing on this case.