The Indian Supreme Court has rejected the Indian government’s claim that Vodafone Group owed $2.2 billion in taxes, stating that the British firm “had no liability to account for withholding tax on its acquisition of interests in Hutchison Essar Limited (now Vodafone India Limited) in 2007.”
The Supreme Court ruled that the capital gains tax levied by the Indian government on asset transfers within India did not apply to Vodafone’s acquisition of assets from Hutchison. This is because Vodafone technically acquired a Hutchison subsidiary based in the Cayman Islands which owned the stake in the Indian operations.
Kevin Phillips, Corporate Tax partner and international tax specialist at Baker Tilly, explains: “As this transaction was carried out between two non-Indian companies, outside India, and the sale was of shares in a Cayman company, Vodafone took the view that India had no jurisdiction to tax the gain that arose for Hutchison Telecom...so it came as a huge shock when India asserted that nonetheless, it had the right to tax the gain arising. Worse still, it did not pursue the seller, Hutchison Telecom for the tax, but rather the purchaser, Vodafone, on the grounds that Vodafone should have withheld $2.2bn from the sales price it paid to Hutchison Telecom and paid it over instead to the Indian tax authorities, as is required under Indian law where such a transaction is within the scope of Indian CGT.”
The government has also been made to refund an INR25 billion (around US$499 million) deposit paid by Vodafone in relation to the tax charge.
The four-year dispute has been a major impediment to Vodafone’s plans for an IPO on Vodafone Essar. The court victory means that an IPO – which could value the Indian operations at up to US$17.6 billion – is now highly likely. Vodafone bought out Essar Group last year to gain full control of the venture, paying US$5.46 billion for its partner’s stake.
Robin Bienenstock, an analyst at London-based Sanford C Bernstein, said: “It takes the IPO a step closer. This wasn’t a good moment for the Indian government to do something hostile.” Vodafone Chief Executive Officer Vittorio Colao had blamed uncertainty over the dispute as a major obstacle to a listing.
This uncertainty has loomed over the country’s regulatory environment throughout the case, as it has cast doubt over whether foreign investors are legally able to avoid Indian taxes by using offshore holding companies. Vodafone’s Harish Salve noted: “The judgment will boost capital investments into India as some tax uncertainty will go away.”
Although Vodafone have not thus far revealed details of a potential IPO, it could value Vodafone Essar at around US$17.5 billion according to Bienenstock, based on roughly 11 times EBITDA – this gives Vodafone Essar a better growth forecast than Bharti Airtel, currently trading at around 10 times EBITDA.
Colao last year noted that Vodafone has retained a 65% stake in South African operator Vodacom after listing the operations in 2009, and that an IPO on the Indian operations could follow this lead. According to Bienenstock, a stake of around 30% in Vodafone’s Indian unit would be worth up to US$5.3 billion.