India's Troubling Retroactive Tax on Vodafone

April 20, 2012

In a brazen breach of the rule of law, India proposed last month to impose a retroactive tax of more than $2 billion on Vodafone for a deal it made in 2007, in which it acquired a majority interest in an Indian cellphone company from Hong Kong's Hutchison Whampoa. Vodafone has challenged the government, initiating international arbitration proceedings this week. Although the tax is designed to target Vodafone, if the government has its way, investors in other companies wouldn't appreciate the precedent and the ensuing uncertainty of their property rights.

From the Wall Street Journal:

U.K.-based Vodafone, which is contesting a tax claim of more than $2 billion stemming from a 2007 deal, on Tuesday said it took the first step toward initiating arbitration proceedings by serving a formal notice to the Indian government.

India last month proposed legislation that would allow the government to tax transactions dating to 1962 in which two foreign firms exchange an Indian asset. The measure would override a Supreme Court ruling in January that Vodafone didn't have to pay capital-gains taxes on the 2007 deal.

[...]

Lawyers have said the retroactive tax would increase the costs and risks of cross-border mergers involving Indian assets and give the government the power to make new claims on dozens of old deals.

Vodafone said the legislation, which is part of a budget package that is expected to be taken up by Parliament next month, is "a denial of justice and a breach of the Indian government's obligations" under its treaty with the Netherlands.

More on retroactive taxes here.

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