India and the Global Investors

     INDIA  remains as an attractive destination for Global investors and while the population, booming economy and the growing purchasing power of the middle class are enticing factors, the official delays, archaic laws and deficiencies in infrastructure remain  as  some dampening factors. And the Union Budget presented this year has given rise to some more issues of concern to investors.

There are some proposals in the Budget to amend certain clauses of income tax which the investors see as reactionary and  Members of the Global business council comprising, what they claim, 250000 independent entrepreneurs have written to the Prime Minister expressing their concern on the viability of investments in India in the light of the proposed amendments.

The new General Anti avoidance rules in the income tax law is the crux of the issue. The new rule is reportedly to curb transactions willfully made at abroad to avoid tax in India. The investors point out that the amendments are to circumvent the court orders in the Vodafone case and that the proposals in the rule are vague and broadly worded. A very recent case between Vodafone and the income tax Department of India had attracted wide attention of foreign investors.

The Hutchison Essar is an Indian company the controlling interest of which was held by C G P investments Holding Ltd and the C G P was owned by Hutchison Telecommunications International Ltd (HTIL) Hong Kong. In this way the controlling interest of the Indian Company, Hutchison Essar was held by HTIL Hong Kong through the intermediary Cayman Island Company C G P Investments Holding Ltd.

  The Vodafone International Holdings, Netherlands, entered in an agreement with HTIL Hong Kong to buy the shares of CGP and since the CGP held 67% of the Indian Company, Hutchison Essar, the controlling interest of the Indian company too got to Vodafone  along with the CGP Investments. The transfer of shares was stated to be for around 11 Billion U S D.
  
The Income tax department issued a notice to Vodafone to show cause as to why it should not be treated as assessee-in-defaut for not remitting the Indian Capital Gain Tax in the purchase of shares of CGP. The Tax amounted to more than two Billion Indian Rupees.

The Vodafone challenged the show-cause notice in the Hon. Bombay high court. However the court dismissed the petition on the ground that purpose of the foreign companies in entering agreement was to hold the controlling interest of the Indian company and the transaction would be subject to Municipal Law of India including the Indian Income-tax act. The Hon. Court also said that the case was one of tax evasion and not tax avoidance.

Thereupon Vodafone approached the Hon. Supreme court for stay of the Mumbai High court order and the Supreme Court ordered on 27.9.2010 to deposit a part of the amount of proposed tax in the court before the case was heard. Vodafone deposited the amount and the Hon. Supreme Court considered the issue in detail. The Supreme Court on 20.01.2012 gave its verdict in favour of Vodafone.

The court held that the offshore transaction made by Vodafone is a bonafide structured FDI investment in to India which fell outside the territorial tax jurisdiction and hence not taxable. The court did not view it as a tax avoidant, preordained transaction. The legal issues involved were complex as the Indian tax laws themselves and the judgment was lengthy discussing all angles in detail.
                                                        
Though the Government of India submitted a review petition in the matter it was rejected by the court. The Government of India lost a sizable amount of money by the Court order.

The industries circles see the tax amendments proposed in the budget ( not yet passed) as an impact of the adverse court order.

Any way the foreign investors are apprehensive of the budgetary proposals and they met Finance secretary R.S.Gujral on 4.4.12 and discussed the issue. They were assured that the Finance Ministry was framing rules on Anti avoidance and would notify them once finished. They have also sent letter to the Finance Minister in the matter.

 Now the investors are watching closely as to whether the proposals on tax would be passed in toto or undergo changes before the Budget is finally passed this month.



Epilogue:  In the budget the Government proposals that hurt the industrial circle were kept in abeyance and a review committee was appointed to look in to the matter. Now the review committee submitted its report against the Government proposals and the Government is unlikely to go ahead with the new rules. It is making  comprehensive rules in the matter and would be be presented in the Parliament soon.

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