White paper claims Vodafone misused corporate structure for tax avoidance

The finance ministry has cited the Vodafone tax case as ''an instance of the misuse of corporate structure for avoiding taxes,'' in its 'white paper on black money' presented in the Parliament.

According to the white paper, many firms misuse tax havens and avoid paying tax in India. The authorities here are unable to take action in cases where money is prima facie brought back to India through round-tripping and other legitimate means.

Corporate structuring was a legitimate means of bringing together factors of production in a way that would facilitate business and enterprise and help the economy, said the white paper. ''However, an artificial personality can also be created of a corporate entity to conceal the real beneficiaries,'' it noted.

''Opaque structuring through creation of multiple entities that own each other and the secrecy granted by certain jurisdictions facilitate such misuse.''

The white paper pointed out that the Hutchisoun group had invested in India between 1992 and 1996 through several subsidiaries having 'separate corporate personalities,' but which were essentially post-box companies based out of tax havens, including Cayman Islands, British Virgin Islands and Mauritius.

Vodafone acquired the India operations of Hutchison for $11.2 billion through the transfer of a solitary share of a firm based in Cayman Islands in February 2007. The former, however, refused to provide details of the firm. ''When the tax authorities requested the accounts of the said company, the answer given was that as per Cayman Islands law, the company was not required to prepare its accounts,'' said the government.

Vodafone was then slapped with a tax demand of about Rs20,400 crore (which includes tax, penalty and interest) on the deal. However, in January, the Supreme Court ruled that Vodafone was not liable to pay tax on the transaction as it was done between two overseas firms and Indian laws did not have a provision for taxing such deals.

In this year's budget, the government amended the income-tax law, enabling it to retrospectively tax deals involving transfer of Indian assets. Vodafone has sent a legal notice to the government.