Indian Supreme Court's Rejection of Indian Tax Department's Appeal Against Vodafone Decision

IndusView Chairman Bundeep S Rangar Comments on Indian Supreme Court's Rejection of Indian Tax Department's Appeal Against Vodafone Decision on ETNow.

Press Release

Proposed Indian Tax Rule Could Impact Free Trade Talks with the EU and Canada

The latest Indian annual budget for 2012-2013, revealed by India’s Finance Minister Pranab Mukherjee last Friday, takes India a step backward toward its previous economic protectionist policies and could derail its discussions for free trade agreements with Canada and the European Union, its biggest trading partner.

The government proposed to levy a heavy retrospective tax on some international mergers that would allow it to tax any overseas merger dating back to 1962 when an underlying Indian asset was transferred, according to taxation experts such as KPMG. India’s Finance Secretary R.S. Gujral has since hurried to clarify that India will claim capital gains tax on cross-border acquisitions completed only in the past six years. An official statement of clarity is still awaited on ambiguously worded budget provisions.

“If passed, this tax legislation will be a shot in the foot of India’s economy,” said Bundeep Singh Rangar, Chairman of London-based advisory firm IndusView UK Ltd. “It sends a message of ever changing goalposts to foreign investors and fund managers and could make India’s risk profile unpalatable to them.”

The announcement in India’s budget comes at a time when India and Canada are in talks to finalize the Comprehensive Economic Partnership Agreement (CEPA) or Free Trade Agreement by 2013. Bilateral trade is expected to nearly quadruple to $15 billion by 2015 from $4 billion in 2010. Since 2007, India and the European Union (EU) have also been negotiating a free trade agreement, officially known as the Bilateral Trade and Investment Agreement (BTIA), that covers trade in goods and services aside from rules pertaining to cross-border investments, competition policy, government procurement and state aid.

For India, free trade with the EU will help its rapidly growing companies expand into the EU, the country's biggest trade partner that purchased more than €40 billion (€53 billion) worth of Indian goods and services in 2010. While trade with India represented only 2.4 percent of the EU's total, that percentage has been steadily increasing. With many EU countries still stuck in recession, the EU wants access to India’s vast, young and vibrant market. The total value of EU-India goods and services exchanged was €86 billion ($113 billion) in 2010 and is expected to reach $200 billion by 2015.

“Free trade agreements are premised on economic openness,” said Mr. Rangar. “The new tax sends a dangerous signal to the contrary and brings back memories of India’s socialist past that made it one of the world’s slowest growing economies,” said Mr. Rangar. “It would not be a surprise if foreign multinationals pressed their governments to bring up this proposed tax in World Trade Organization (WTO) discussions. Or they will simply walk away from India. In either instance, India stands to damage its international standing.”

India is hoping to accelerate its GDP growth to 7.60 percent in the year to March 2013 from 6.90 percent in the year to March 2012. That was far less than the 8.50 percent achieved in year to March 2011.

The disturbing thing is that the tax is retrospective irrespective of whether it is applied for the past 50 years or six years. The Indian budget stated it would seek to change India’s laws to enable the Indian taxman to tax capital gains made by foreign companies after it lost a $2.2 billion court battle with Britain’s Vodafone Plc in January. Today, India’s Supreme Court dismissed the Indian tax department’s appeal to review that decision.

“Foreign investors will seriously and understandably question the stability of the regulatory environment in India,” said Mr. Rangar. “India is entitled to tax local companies for capital gains and corporate income tax. Taxing overseas entities for Indian assets purchased over the past 50 years, however, is a step too far, very impractical to implement and could lead to reciprocal tax treatment for Indian companies that purchased overseas assets. That would be a double blow to India Inc.”

Vodafone’s purchase of Hutchison Essar, since renamed Vodafone India, was intended to expand revenue in the face of saturated mobile telecoms markets in Western Europe. India presents itself as one of the world’s fastest growing economies, a position achieved via the opening of its economy and flood of Foreign Direct Investment (FDI). India’s latest budget, however, threatens to squeeze that tap of overseas funding. FDI in India is expected to cross $35 billion in financial year to March 2012 compared with $19.43 billion in the previous financial year.

The Indian government’s motivation seems to be to increase its tax collection and reduce its budget deficit to 5.1 percent of gross domestic product next fiscal year, from 5.9 percent this year by capping subsidy spending and raising taxes. India had targeted a budget deficit of 4.6 percent for the current fiscal year ending in March 2012 and will miss that by a wider margin than many economists had expected.

“Increasing tax revenue is a laudable goal for India,” said Mr. Rangar. “That should, however, come from encouraging the number of new financial transactions not squeezing those that do take place. Besides, India has a dismal income tax base of 2.77%. The government should focus on increasing that tax base rather than punishing corporate buyers of Indian assets.”

The Minister of State for Finance S.S. Palanimanickam said in a written reply to a question posed in India’s Parliament last August that the number of taxpayers was 33.57 million out of a 1.21 billion population.

Another clause in the Union Budget 2012, which proposes to tax angel investments, has been termed by more than a dozen industry watchers as “a death blow” which has the “potential to kill entrepreneurial-startup ecosystem” in India. The decision has already created negative feedback among entrepreneurs and might lead to depressed valuations for these companies. Under this proposal, the government will treat all individual investments in a company as “income from other sources” and they will be subject to a tax of 30% at the hands of the companies.

For capital markets, the government announced a number of measures, including tax incentives for small investors in equity savings schemes, reducing taxes on securities transactions, allowing qualified foreign investors in the domestic bond market and easier norms for listing of corporate bond offerings in exchanges.

The budget also sought to restrict subsidies and move to a direct cash transfer system, both seen as positive moves. The government proposes to limit subsidies to 2% of GDP over the next three years and 1.7% thereafter. It also encourages adoption of the Unique Identification (UID) system to provide for direct cash transfers to recipients.

The budget was also positive for investments in infrastructure. More infrastructure sectors were added as eligible for gap funding from the government. The amount of tax free bonds which state-owned infrastructure companies can issue was doubled from $6 billion to $12 billion (from Rs.300 billion to Rs.600 billion); spending on key infra sectors was increased significantly; foreign financing through the External Commercial Borrowing (ECB) guidelines was opened for capital spending on highways, working capital for airlines, low cost affordable housing, among others.

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Revoked Indian Telecom Licenses Spur Legal Action

The Indian Supreme Court’s decision to revoke 122 licenses granted to eight telecommunications companies as part of a $40 billion scam allegedly perpetrated by the country’s former telecom minister is spurring a wave of legal and managerial reactions.

The cancellation of the licenses was a blow to the Indian government’s credibility. But the man who granted the licenses — former telecom minister Andimuthu Raja — is in jail facing charges of corruption. To challenge the court decision would be interpreted by the public as supporting the corrupt, which is politically unacceptable. A targeted reaction is more likely. Telecom secretary R. Chandrashekhar told journalists at an apex chamber meeting on February 29 that a decision would be taken in a couple of days. “We are not looking at challenging the cancellation of the licenses per se,” he said.

The companies affected by the license cancellations have already swung into action, however. On February 29, Tata Teleservices, which has had three of its licenses cancelled, moved the court. Idea Cellular, a Kumar Mangalam Birla company that had 13 of its licenses cancelled, had gone to court a few days earlier, seeking a clarification.

But the acrimonious action is really coming from the foreign companies that set up joint ventures with Indian firms that had obtained the licenses. Telenor of Norway, which had partnered with realty company Unitech for its telecom foray, has dumped its Indian partner. The Norwegian firm has approached the Company Law Board to prevent Unitech from obstructing its bid to form a new company. It has also sought unspecified damages from Unitech. The Norwegian company plans to bid for licenses through the new company. The Supreme Court has recommended that the 122 licenses revoked be auctioned off. This time, foreign companies may be allowed to bid on their own. The joint venture — Uninor — had 22 licenses.

Russian conglomerate Sistema, which had partnered with Shyam Teleservices to set up Shyam Sistema, has said that it will take the government of India to the arbitration table. The company says that the government failed to issue “proper licenses.” Sistema has evoked the provisions of the bilateral investment treaty between Russia and India.

Etisalat of the United Arab Emirates has started legal proceedings against the promoters of Swan Telecom, with whom it had joined hands to set up Etisalat DB. (The DB part of the name comes from DB Realty, a company belonging to the same owners as Swan.) The charges made by Etisalat are “fraud and misrepresentation.” According to an Etisalat statement: “Etisalat is facing very significant financial losses on its investment despite having no involvement in the 2G license application or award process…. As a leading international telecom company with a high reputation for integrity and ethical behavior, [Etisalat] has taken this action to protect its interests and those of its shareholders.”

Elsewhere, Anil Ambani’s Reliance Infratel has taken Etisalat DB and STel to the telecom regulator — the Telecom Disputes Settlement & Appellate Tribunal — for the recovery of dues. STel, which lost six licenses, has apparently decided to exit the Indian market. S. Sivasankaran, chairman of the Siva Group and a major investor in STel, has written to the Prime Minister asking that the $350 million paid as license fees be returned. Another investor in STel — Bahrain Telecom — has already sold its stake. Etisalat has meanwhile announced that it will pull out; it has written off most of its investment.

So could this telecom tangle provoke a more general pullout and a slowdown in foreign direct investment (FDI) in India? “There is likely to be a short-term ebb due to caution on the part of foreign investors, greater due diligence on local partners and more legal protection in contracts that will be time consuming,” says Bundeep Singh Rangar, CEO of IndusView, a cross-border M&A consultancy. “In the mid-to-long term, however, there will be an increase in FDI as the Supreme Court ruling signifies a cleaning up exercise that will lead to greater accountability and transparency for FDI and related processes such as auctions and applications for licenses and investments. That will give greater comfort to foreign investors about the soundness and protection of their investments in India.”

http://knowledgetoday.wharton.upenn.edu/2012/03/revoked-indian-telecom-licenses-spur-legal-action/

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Republic Day – India, January 26 2012

Today, January 26, marks Republic Day in India, an annual event commemorating when the Constitution of India came into place on January 26, 1950. 

Various celebrations are held throughout the country, with the largest taking place at the capitol (New Delhi). The highlight of the celebration is a parade that is held in New Delhi at the Rajpath with military members dressed in their finest attire, a favorite of everyone in attendance and watching on television from afar. 

There is also always a state guest invited each year; this year it is Prime Minister Yingluck Shinawatra of Thailand. The President starts the ceremonies with a symbolic gesture by laying a headdress at the Indian Gate in memory of all Indian military members who have given up their lives for their country. 

Following the grand parade are tributes to each state which portray the vast diversity of cultures through various displays such as poems, songs, and dance. The ceremonies are ended with the Beating Retreat, played by the Indian Army, Navy, and Air Force; a moving way to end such an important day. 

Being one of the three national holidays in India, it is a favorite among all; Republic Day ignites strong patriotic feelings among everyone towards their country allowing each person to feel they are a part of something bigger than just themselves. 

Enjoy your Republic Day celebrations…Happy India Republic Day 2012!

Vodafone Indian Supreme Court Win A Positive Sign for Foreign Investments in India

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.

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