New tax law: Vodafone threatens arbitration against government

Vodafone Plc today served a notice of dispute against the Indian government as a first step towards seeking international arbitration in a dispute over the proposed retrospective change in tax laws that could cost the British telecom giant close to Rs12,000 crore in taxes over the overseas deal with Hong Kong's Hutchinson Whampoa to acquire its 67-per cent stake in Hutchison Essar in India.
 
Vodafone's Dutch subsidiary has served a notice of dispute to India's prime minister and other top officials saying arguing that the retroactive tax on overseas transfers of Indian assets proposed by finance minister Pranab Mukherjee in his union Budget for 2012-13 violates legal protections granted to international investors, the company said in a statement from London.

Vodafone, the largest foreign direct investor in India, probably thought it had won a final victory after the Supreme Court dismissed the government's tax case against it over its 2007 acquisition of a majority stake in Hutchinson-Essar, now Vodafone India, for close to $11 billion (See: Vodafone wins tax case in Supreme Court).

The court ruled that the transaction took place overseas between two foreign companies, and the law did not permit the deal to be taxed in India. Subsequently, it also turned down a review petition filed by the government (See: SC rejects government's review petition in Vodafone tax case).

While the proposal to tax overseas transactions involving Indian assets with retrospective effect from 1962 is yet to be ratified by Parliament, it is probably a mere formality in the passage of the finance bill; and Vodafone is trying to take pre-emptive action.

In its notice to the government, Vodafone said it would invoke the provisions of the proposed legislation under the bilateral investment treaty between India and the Netherlands.

In a separate regulatory filing to the London Stock Exchange, Vodafone said it has asked the Indian government to abandon or suitably amend the retrospective aspects of the proposed legislation, as Vodafone would prefer to reach an amicable solution to this matter.

"However, if the Indian government is not willing to do so, Vodafone will take whatever steps necessary to protect its shareholders' interest, including investment treaty arbitration proceedings under the BIT against the Indian government," the company said.