Income-Tax Department Serves Notice On The Government And Not Vodafone

The issue of notice to Vodafone, from all public accounts, appears to be a case of malevolence.

Newspapers in India carried the story on 24 January, 2016 of the promise of the Indian Prime Minister to foreign investors that retrospective taxation was a thing of the past and that it would not be opened again in India.

Little less than a month later, newspapers have splashed the story that Indian tax authorities have sent another notice to Vodafone warning the company that if it did not pay the income tax dues of about 14,200 crore of rupees, its assets in India could be seized. The tax dispute between revenue authorities in India and Vodafone, Plc. is under arbitration in The Netherlands.

It must be very clear, even to a High School student, that elements within the Revenue Department are a law unto themselves. Their objective is evidently perverse – to undermine the government. Within weeks of the Prime Minister’s promise that the regime of retrospective taxes has ended, if they can serve a notice, it is rather clear that it is a case of wilful disobedience with an intent to sabotage the government’s economic agenda.​

It reflects rather poorly on the leadership of the Ministry of Finance (MoF) too. Either they are powerless or they are complicit. The Ministry is clearly not aligned with the Government’s goal.

There are many on the Religious Right who feel that the Government has let them down on their demands to end discrimination against Hindus – principally with respect to Education and in the running of their own religious institutions. They argue that the focus on ‘Vikas’ is not enough. The issue is that, even on ‘Vikas’, the government is not being allowed to pursue its goals by a section of the bureaucracy.

The issue of notice to Vodafone, from all public accounts, appears to be a case of malevolence. It is mala fide. The issue is not about whether there is something inherently wrong about Vodafone did. According to this article in MINT, it has three disputes with Indian tax authorities. As R. Jagannathan wrote in a different context, one needs to be ‘smart’ and not ‘strong’ when fighting some issues.

This notice is not a show of righteous strength. It is a show of arrogance and obstinacy that – intentionally or otherwise – destroys the climate that the government wishes to create. Retrospective taxation is hard to defend, no matter how devilishly clever and evasive the transaction was.

The American government went after French banks and Swiss banks, etc. But, it did not do so by retroactively creating legislation. It had muscle to do so. So, it went after foreign entities. India did a retroactive tax law amendment and it does not have the muscle. That is the hard reality. India needs to play to its strengths and weaknesses.

The existence of a company in Cayman Islands in which Hutchison International had a controlling stake with the Cayman-domiciled company, in turn, holding the stake in Hutchison-Essar is, of course, a tax avoidance mechanism. All over the world, companies, individuals and fund managers continue to set up complicated structures to incorporate themselves in tax havens.

India continues to have Double Taxation Avoidance Agreements with Mauritius and with Singapore. International companies continue to invest in India through these jurisdictions. Even Indian fund managers that have international investors as limited partners incorporate their Funds in these locations. Hence, what happened in the Vodafone – Hutchison International transaction is neither unexpected nor shocking.

Now, all countries are going after tax dodging, tax evasion and even tax avoidance. The Organisation for Economic Co-operation and Development has made information sharing among nations with a view to plug tax arbitrage by taxpayers its important priority. India too can take advantage of the globalisation of the taxman’s zeal.  India can do that for all future deals even as it courts Foreign Direct Investment (FDI).

In 2012, Prof. Rahul Varman wrote that the Vodafone deal was a mere transfer of ownership from Hutchison to Vodafone and not fresh FDI. He cited Prashant Bhushan in support of this point. That is flawed. If the business were growing, then a company with controlling interest and stake would invest in expansion of capacity and additional products, etc.

Vodafone went on to acquire the remaining stake in Vodafone India. It holds 100 percent. India is an important market for Vodafone. Further, this article notes that Vodafone’s EBITDA margin in India is over 31 percent higher than its EBITDA margin elsewhere, except in Germany. So, they will continue to invest.

India’s domestic savings are not adequate to fund its infrastructure and other investment needs. After 25 years of the modest take-off of the Indian economy, the national savings rate, after the recent data revisions, was at 32.3 percent (Gross Savings/Gross National Disposable Income) in 2014-15.

Countries in East Asia that went from developing to developed status, achieved savings rates of over 40 percent. India needs to supplement this. Even if FDI never rose above four percent of GDP, it would be a big sum if India got four percent of GDP as FDI (around USD80 to USD90bn).

According to the article in MINT, government officials including Mr. Hasmukh Adhia were defending the serving of notice, as a procedural matter, as though the serving of the notice was a routine thing without which India’s claims under the arbitration procedure would become untenable.

If it were the case, the Tax Department could have issued a clarification immediately – that it is being done to keep India’s claims LIVE until the arbitration is settled. Logically too, it is hard to believe that the serving of the notice would, in any way, influence the arbitration proceedings.

There is little personal consolation in seeing the script playing out the way as I had written in ‘Swarajya’ in May 2015. This government will not be and is not being allowed to govern. But, a smart combatant would have anticipated it and been prepared to handle it. Of course, the homework and preparation had to be thorough, extensive and even ruthless, on occasions, but in a smart and sophisticated manner. ​​

Not only have all these been missing but there has been plenty of missteps, strategic and tactical errors and self-goals. ​The BJP is scoring self-goals in non-economic matters. On economic matters, it is being stymied by both political and bureaucratic hostility. The BJP will suffer grievously politically and the country will suffer enormously economically.

When the BJP regained power in May 2014 with an unexpectedly large mandate, it had assumed that the Opposition would roll over and play dead. That reflected both poor preparation and hubris. It had not anticipated the resistance it would encounter from those ideologically opposed and others who benefited under the earlier dispensation.

It should have anticipated their next moves. In other words, did the BJP leadership think like a good chess player? Perhaps, the right question to ask is if it wanted to and was capable of such a preparation. It is clear that it has not. Hence, it is always on the backfoot, defending itself and its supporters bend over backwards to help the government extricate its foot from its mouth.

Something is seriously wrong with the leadership of the Party and the nation and not just at the MoF.Here is hoping that my conclusion is hopelessly wrong.