IndusView, 20 January 2012 (London) – The decision by India’s Supreme Court in favor of Vodafone Group Plc, the world’s biggest mobile phone company, is a positive signal to foreign investors worried about tax and investment policies in the world’s second fastest growing major economy.
“This was a litmus test won by foreign investors against an attempt by the Indian taxman to extend its jurisdictional reach,” said Bundeep Singh Rangar, Chairman of IndusView, an India-focused advisory firm. “It provides tax certainty to foreign investors as the verdict is a clear statement that deals done outside India that involve Indian assets, are not taxable in India.”
With a recent decline in Indian stock valuations, drop in the Indian rupee currency and the opening up of sectors such as India’s retail market, Indian companies are likely to become attractive targets for foreign acquirers this year. They were cautious and even nervous, however, given the unknown tax implication of Vodafone’s 2007 $11 billion acquisition of Hutchison Essar Ltd, India's second largest GSM mobile service. The court decision today ends uncertainty in a manner that’ll be welcome news by foreign companies seeking to invest in India.
In 2011, seven of the 10 multi-billion dollar deals were inbound ones, i.e. foreign companies buying Indian ones. Multi-billion dollar deals included Vedanta Plc’s acquisition of Cairn India assets that was also mired in a 15-month long regulatory quagmire and BP Plc’s acquisition of Reliance’s energy assets. That’s likely to increase now that uncertainty is removed and could see a reversal of the 20% decline in deals in 2011. The value of merger and acquisitions and private equity investments in India totaled $54 billion in 2011 compared with $62 billion in 2010.
The Indian tax department sought 112.2 billion rupees ($2.2 billion) in capital gains tax on Vodafone International Holdings BV’s purchase of Hutchison’s mobile operations in India. While Hutchison profited from the sale, the tax department pursued Vodafone, saying the company should have withheld the tax from its payment to Hutchison.
Vodafone took its fight all the way to India’s Supreme Court to protest the potential $2.2 billion tax bill on the grounds that the deal was between two overseas companies, tax was applied retrospectively and capital gains tax is paid by the acquired company, not the buyer. If Vodafone’s appeal were unsuccessful, it could have seen its charge double to $5bn due to a penalty for non-payment of tax. It is now also entitled to a refund of $550 million deposit with the Indian tax authorities.
With a subscriber base of more than 851 million, the Indian mobile phone market in India has grown to become the second largest in the world after China after it was opened to private companies in the 1990s. Vodafone has the third largest subscriber base in India following market leader Bharti Airtel and Reliance Communications.