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Finance Ministry has 4 legal options in Vodafone retrospective tax dispute

The Finance Ministry is considering a detailed legal view on the Vodafone tax case and highly placed sources told CNBC-TV18 that four options have been suggested to the finance ministry as the “way forward”.

“A detailed presentation highlighted the pros and cons of each of the four options and acknowledged the risk to the ‘perception of India as an investment destination’. A Group of Ministers is likely to discuss these options soon before taking a final decision,” a source told CNBC-TV18 on the condition of anonymity.

The International Arbitration Tribunal had ruled in favour of Vodafone on a tax demand of Rs 20,000 crore, recently.

According to sources, the options available with the government includes, “Challenging the award in its entirety, where the grounds for challenging will primarily be the fact that the Arbitral Tribunal had erred both on facts and in law and taxation, is outside Bilateral Investment Treaties or Bilateral Investment Partnership Agreement (BIPA),” sources told CNBC-TV18.

“If this option is selected, the downside is that the ‘perception of India as an investment destination’ could be questioned. Also, if the High Court of Singapore confirms the arbitration award, it would become a judicial precedent and India will have to honour it. India can stop the enforcement on limited grounds, including public policy,” sources added.

The second option available to the government is to “challenge the award, particularly the sovereign immunities of the award, to be exercised post refunding the tax collected,” sources added.

This implies that the award has not challenged the sovereign right of India in any manner. “Rather, the arbitration award has only dealt with a specific retrospective amendment on facts as anti-investment. Thus, to challenge the law without the underlying factual transaction may not get the desired result and it would just become a mere academic option and not issue based,” sources explained.

“If this option is exercised then there are 15 other connected tax matters, such as Cairn Energy, Richter Holdings, Westglobe Ltd etc, where India has collected tax from only a few companies, which would need to be refunded along with interest. This is a major downside as the amount that would need to be refunded is Rs 7,600 crore along with interest,” sources added.

The third option, which the Group of Ministers could consider is: “Seeking a settlement with Vodafone, where there will be a condition that it should be an initiative of Vodafone and India’s disagreement with the tribunal order that would need to brought on record,” sources said.

“But, this settlement is purely from an investment angle and Vodafone would have to waive all its rights in view of the settlement,” sources added.

However, the major downside here is that the Rs 7,600 crore that has been collected from Cairn Energy and Rs 45 crore from Vodafone will have to be refunded along with interest. “Also, the government will not have powers to collect rest of the tax demands proposed and that have been confirmed in many cases. However, penalties and interests for the period prior to the amendment imposed are legally not sustainable and therefore, government will have to factor only taxes and interest, post the amendment for calculation purposes,” sources explained.

The last option suggested as the formal legal view includes, “The idea of getting in a new law and withdrawing the 2012 amendment — which allowed retrospective taxation. Here, the government can consider making a political or a policy choice by passing an amendment to the 2012 amendment and nullify its retrospective effect. Again, the downside being that it should not send a wrong signal to investors about India’s perception as an investment destination.

“Legally, it is understood that if such a decision is made, then it will send a clear signal to the investing community about the stand of the government on foreign investment. However, the government will have to refund Rs 7,600 crore collected with interest to Cairn Energy and Vodafone,” sources said.
Nonetheless, all eyes would now be on the Group of Ministers’ meeting and its outcome, which could pave India’s way forward in the Vodafone tax dispute case.

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