Tax Havens

Tax Havens

The term Tax Haven refers to a jurisdiction that is Tax advantageous in some way. However, not all Tax Haven jurisdictions are alike. Some jurisdictions may have special Tax treaties with other nations.

A so-called Tax Haven may levy no or very insignificant taxes.

India has a comprehensive Double Taxation Avoidance Agreements with 88 countries. This means that there are agreed rates of tax and jurisdiction on specified types of income arising in a country. Mauritius is one of the major Tax Haven for India.

Case: Vodafone vs. The Indian Income Tax Department.

The case concerns a tax dispute between the Vodafone group and the Indian income tax (IT) authorities over the acquisition by Vodafone International Holdings BV of the entire share capital of CGP Investments (Holdings) Ltd on February 11, 2007 for about $11 billion from Hutchison Telecommunications International Ltd . The acquisition resulted in Vodafone acquiring control over Hutch-Essar Ltd., an Indian Company. Since the sale was supposed to have been made overseas, no taxes were paid in India.

However, the Indian Tax Authorities asked Vodafone to pay Tax over the Transaction. The case was taken to Bombay High Court. The Court said that the transaction was one of transfer of capital assets situated in India, and accordingly, the Indian income-tax authorities had jurisdiction over the matter. As the purpose of entering into agreement is to acquire the controlling interest, which HTIL (a foreign company) had in HEL (an Indian Company), and as acquired. Income Tax shall be deemed to be accrued or arise in India.

The case was challenged in Supreme Court.According to the court, Tax Authority had no jurisdiction to tax the foreign transaction, as sale of shares took place in Cayman Islands. Transfer of shares in CGP does not amount to transfer of Capital asset situated in India.

After the Supreme Court’s Decision, the government made Amendments in Finance Act 2012, enabling IT Authorities to tax Vodafone and other such companies retroactively.

The dispute still continues.

• Jun '13: Cabinet offers conciliation talks but Vodafone not ready to accept proposal
• Apr '14: Vodafone insists on international arbitration; India withdraws conciliation offer
• June, 14: Finance Minister Arun Jaitley recuses himself from Vodafone case
• June, 14: Government appoints former chief justice of India, R C Lohati, as arbitrator

Root cause of such disputes

The Double-Tax Avoidance Agreements were signed with a good spirit to harmonise relations with countries and to attract foreign capital into the country. However, the times have changed. Now, the MNC’s are large enough to manipulate laws, and government is also not that dependent on investment through such Tax Havens. This brings up conflicting interests where companies try to mend laws, and government tries to restrict misuse of such rules. Such kind of situations lead to disputes which might worsen an economy’s image. Moreover, the Indian Laws are so complex and twisted that sometimes it promotes ambiguity, leading to disputes. 

Impact on India as an Investment-Avenue

Similar to the above mentioned case, India has Tax disputes with various foreign companies, Vodafone, Nokia, Microsoft, Shell, and IBM, to name a few. Such incidents make business in India highly uncertain and risky, from the point-of-view of the investor. India’s retroactive application of new rules and regulations, assessments that appear malicious to companies, tax law that is inconsistent with global tax norms, opaque and allegedly abnormal application of transfer pricing rules, are making India an unattractive Investment-Avenue.

However, the way Judiciary of the country is playing its role has brought positive sentiments in the investors. As Vodafone case clearly describes the way Judiciary work as an independent body, away from parliamentary pressure. Even after such a strong stand made by the Indian government, Vodafone has an equal platform to put forward its argument. A strong and independent Judiciary not only inspires a fair business environment, but also creates a balance between the power and the stake of different parties i.e. the foreign investor, the regulatory body and the domestic entities involved, thus facilitating business and retaining investor’s confidence.

Government’s role in Overcoming Barriers:

The first role of the government here is to be “clear and absolute” while implementing Laws. The rules should be such that are clearly stated and avoid ambiguity and immune to manipulations. Moreover, in order to sustain investor’s confidence in the market, it’s the duty of the government to avoid making retroactive amendments. Retroactive amendments break the trust of an investor in the Law of the land, which is catastrophic for any economy.

The kind of thrust in economy provided by our Prime Minister Narendra Modi, through his policies declared regarding investments from foreign lands, can be very instrumental in re-establishing the investor’s trust in the Indian Markets. Moreover, finance ministry has done a great job in coming clear on its stand on retroactive amendments. These are some factors that, among others, affect a foreign investor’s sentiments to a great level.

-Harshul Jain