Vodafone may invoke bilateral pact to thwart taxman

Faced with the prospect of having to pay almost Rs12,000 crore in taxes through a proposed change in tax laws with retrospective effect, UK's Vodafone Plc is exploring all avenues to avoid this liability, including seeking arbitration and moving the Supreme Court challenging the constitutional validity of retrospective amendments.

InIn his union Budget presented earlier this month, finance minister Pranab Mukherjee seeks to amend the Income Tax Act with retrospective effect from 1962 to tax overseas transactions involving local assets (See: Bent on taxing Vodafone, govt to change laws).

The move was provoked by the Supreme Court verdict that Vodafone did not have to pay tax in India over its 2007 deal to buy Hutchinson Whampoa's stake in what was then Hutchinson-Essar (See: SC rejects government's review petition in Vodafone tax case).

Reports suggest that if its challenge of the new law in the Supreme Court fails, Vodafone could invoke a little-known investment pact between India and the Netherlands that will allow it to claim back taxes it may be forced to pay.

It is likely to press for arbitration proceedings with India as provided for under the India-Netherlands Bilateral Investment Promotion and Protection Agreement (BIPA).

If Indian tax authorities enforce the payment of tax by Vodafone, the UK firm believes it would constitute a breach of the treaty, allowing it to claim back damages of an equal amount from the government as compensation.