Get an Arbitrator, Settle the Tax Dispute
The Vodafone tax case has been hanging fire for far too long. This long delay is not in India’s interest as it seeks to attract greater investment into the country. Both the government and the company are open to finding a mutually acceptable resolution through arbitration. However, choosing arbitrators acceptable to both parties seems to present difficulties, hence the decision by Vodafone to move the Hague-based International Court of Justice to appoint a judge who will preside over the arbitration. It is time that this case was settled.
The government is clear that, of the capital gain that accrued to Hutchison Whampoa, when it sold its 67% economic interest in the holding company that owned Hutch-Essar to Vodafone for $11 billion, a share belonged to the government that had allowed value to be created both in general and specifically by not charging upfront payment for spectrum so that telecom would spread fast in the country. But to make this claim, the government had to resort to a retrospectve clarification the tax law always sought to include indirect transfers via a change of ownership of a holding company registered abroad, in its provision on capital gains. This had led to much controversy, which helps no one. The government has also made it clear that is interested in bringing this vexed case to a close: the Budget offers a one-time scheme of Dispute Resolution, by which the case can be settled by paying only the original tax demand, lopping off interest and penalty.
Vodafone might need an arbitration order to justify to its shareholders payment of tax in a compromise settlement. An arbitration award would shield the government also from charges of causing loss to the exchequer by waiving penalty and interest on the original tax demand.