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Insatiable Cupidity

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The Vodafone saga refuses to end — all thanks to the government of India. The basic point of this case is simple. When the government sold telecommunications licences from the late 1990s onwards, few Indian business houses had the money to buy licences or appetite to hold them until they became profitable. So the government allowed them to bring in foreign partners. Essar (an abbreviation for Shashi and Ravi, the Ruia brothers) brought in as foreign partner Hutchison Whampoa, the company of Sir Ka-shing Li, who is reputed to be even richer than Mukesh Ambani. Hutchison sold its stake to a Dutch subsidiary of Vodafone in 2007. The transaction was made in Cayman Islands. Sir Ka-shing made good profits, but he was in Hong Kong, beyond the reach of the Indian government. Indian tax authorities — the Central Board of Direct Taxes of the finance ministry — sent a notice to Vodafone that it had bought an Indian business and asked it to shell out $2.5 billion in tax.

Vodafone went to court against the notice. The Supreme Court has held repeatedly that the transaction took place offshore and is not taxable in India. This is elementary. The world is divided into countries. They have frontiers; no place in the world belongs to more than one country. Within its borders, a country has a universally recognised right to impose taxes. That right to tax ends where the frontier of another country begins. This has been the universal practice for decades, if not centuries. If there were no such rule, we would have complete chaos. The government of India would send a tax notice to the 118 flea markets in Indiana, and charge them hefty sums for selling flowers and antiques. Big Bear flea market would approach the government of Indiana and ask who is ruling in Indianaville. The government of Indiana would approach the US government, which would tell India to behave itself.

Now the government has unilaterally changed the rule: it wants to tax Vodafone because it bought a business located in India. Such a rule is not inconceivable; instead of the place of transaction, one could tax transactions on the basis of the location of property transacted. But even the grand government of superpower India cannot do that on its own; it would have to get the agreement of all other countries. It can try. All that the Prime Minister has to do is to go to the next G20 meeting in Los Cabos in Baja California Sur on Mexico's west coast, serve his fellow heads of state some good wine, and gently persuade them to change the rule. The Group of 20 has already concerned itself with tax havens. The G20 countries consider tax havens as robbers who steal tax revenue from them. Tax havens may not be in G20; but they are sovereign countries. As such, they have the right to decide their own taxes, even if they choose not to have any. G20 could invite them to one of its meetings and try to persuade them to raise their taxes; but it is unlikely to have any success. Alternatively, it could invade and annex the tax havens; but such international violence can have unpredictable effects, and will not be indulged in lightly. Briefly, even the persuasive skills of Montek Singh Ahluwalia are likely to win over or lead to the conquest of tax havens.

The government is full of argumentative lawyers who made fortunes making courts bend rules; surely they can find some way around its dilemma? They have not been inactive; the Prime Minister no doubt took their advice when his government decided to teach Vodafone a lesson. They would say that there is nothing in international law or practice to prevent India from taking unilateral action; and they would have made a list of faintly similar instances in which governments have taken unilateral action. That established precedent, which is a favourite weapon of the lawyer.

I would like to ask these clever gentlemen three questions. First, even if they think that India can change the basis of international taxation unilaterally, should it not legislate it? Second, surely the law must apply to future transactions, and not past ones? If the government could change law retrospectively, who in the world would have any trust in the rule of law in this country? And finally, if someone has to be taxed, it must surely be the business that made a capital gain, namely the owners of Hutchison Essar, for instance, Shashi, Ravi and Ka-shing? Surely the government cannot tax Vodafone just because it is foreign, and let off Essar because the Ruias are handspun Indians? And I would ask my fellow Indians: do they want an arbitrary government? Today it turns on Vodafone; tomorrow it may ruin you or me.
The author is Consultant Editor of Businessworld. ashok(dot)desai(at)gmail(dot)com

(This story was published in Businessworld Issue Dated 02-04-2012)