How To Kiss & Make Up With Vodafone?

Whoever coined the phrase Incredible India would have hardly expected it to extend to tax policy! But it does! Incredible India is the best way to describe the Vodafone saga – in which after a many year court battle a company wins a multi-billion dollar tax case in the Supreme Court, only to lose to a retroactive amendment of law and then discover that the unfortunate reversal of fortune may now be followed by a kiss and make-up session with the government. Well, technically it’s called conciliation and this week, government armed with a brand new law minister, decided to proceed and conciliate the Vodafone tax matter. What will the elements of this conciliation be? To talk about that, I have with me Supreme Court Senior Counsel Arvind Datar, Lawyer and Tax Expert Rohan Shah of ELP and veteran Tax Consultant Ketan Dalal of PwC.

VODAFONE CONCILIATION
Govt Says
It will be a non-binding conciliation
Conciliation proposal would not bypass/alter tax liability
Nothing will be done without Parliament’s approval
*Source: Indian Express

Doshi: What this conciliation process is going to be- its elements, its design and ultimately its outcome?

Shah: I think it is just a conciliation loosely called so; it is not a classical statutory conciliation but its elements will effectively be whether the government of India and Vodafone can agree to a path in terms of how they should resolve this controversy, which at the minimum has three elements- the tax that is supposed to be due, the interest and the penalty. And one approach could be which is for the government of India to turnaround and say no retrospective amendments in terms of which none of these three elements would be payable but I do not think that is on the table. What seems to be on the table is would Vodafone consider paying all or some of the tax and in lieu of that can the government of India take away the interest and penalty burden.

Vodafone Owes: Tax – Rs 8000 cr, Interest - Rs 4000+ cr, Penalty – Rs 8000cr

Doshi: I understand that the penalty can be waved given previous Supreme Court’s decisions regarding retroactive amendments. Some lawyers tell me there are provisions within the existing Income Tax Act to even wave all or part of the interest. So, if that can already be done without a conciliation process, then what is this conciliation going to amount to if it does not amount to a reduction in the principal amount?

Dalal: You are right and as Rohan said we are talking of three elements; tax, interest and penalty and for the life of me I cannot see that the penalty even in normal circumstances could have stuck.

Doshi: What about interest, do they need a Circular or a change in law to wave the interest either all or part of it?

Dalal: To my mind there is a provision under Section 119 of the Income Tax Act under which the Central Board of Direct Taxes can issue an order for an assessee or a class of assessees and indeed they have done that in the past in the context of certain amendments, which were made in Section 80 HHC, which dealt with some export profits. So this means that if at all there is conciliation and as Rohan said it could be loosely worded as such, the conciliation could be only be for the principal amount.

Ketan Dalal Says
Penalty will not stick. Interest waiver can be done via Circular
Conciliation to negotiate reduction in principal tax amount

Doshi: If the heart of this conciliation has to do with renegotiating the principal amount, then that would need an amendment to the Income Tax Law. Have I understood this correctly?
Datar: Not really but before I answer that question I want to supplement the point of penalty and interest. As far as penalty is concerned, I agree with Ketan Dalal, there is absolutely no question of any penalty being levied. There are Supreme Court judgments to that effect and as far as interest is concerned there is a specific notification issued in May 1996 saying that it is a retrospective amendment then interest can be waived. Coming to your question on method of coming to the settlement without Income Tax Act- there is one area in which you can settle the matter without the Income Tax Act, in fact your programme talks of kiss and make up. I think there is an honorable wave of kissing and making up and two dishonorable ways of kissing and making up.
The honorable way is to accept the judgment and say that the law will be prospective. That is one part.

The two dishonorable ways of kissing and making up will be this. Vodafone, to my knowledge, has invoked the bilateral investment treaty. There the Union of India is respondent. Now they can come to an agreement, theoretically, that let us say that Rs 5,000 crore will be paid by Vodafone as a settlement in full and final settlement. There will be an award on consent terms whereby Vodafone pays only Rs 5,000 crore as against this liability of Rs 10,000 crore. That award will be binding on the government of India without amending the Income Tax Act. That is one way of doing it. The other way which they are now trying is, they are trying to come to some kind of non-binding conciliation which will be placed before Cabinet and then before Parliament. I do not know how it is going to pan out, under which provision of law they are going to do this and it is going to lead to more and more complications.

Doshi: In the second case – for a moment if I was to leave the investment treaty aside – in the second case any negotiation on the principal amount would in a sense be violative, if I can use that word loosely, of the retroactive amendment itself. So there would have to be an amendment to that retroactive amendment or Section 9 and hence an amendment to the law to allow for a reduction in the principal amount. Have I understood that correctly?

Datar: One way is to amend the retrospective amendment. The other possibility is to introduce a new Chapter in the Income Tax Act permitting the government to come to such kind of settlements. At present this issue cannot be settled through the Settlement Commission so you may have to have a law which permits such kind of settlements in future because if you make a law only for Vodafone then again you are risking violating Article 14. It has to apply to all similarly placed assesses. So, if it a law only for Vodafone then makes it that much more vulnerable.

Therefore, to answer your question yes, if the non-binding settlement is then approved by Cabinet and then it goes to Parliament then you will have to necessarily amend the Income Tax Act to reduce the liability.

Arvind Datar Says
Settlement under BIPA does not require supporting law amendment
Otherwise can amend Sec 9 to allow for waiver

Doshi: If this is done under the aegis of the investment protection treaty, then what kind of precedent does this set for other tax disputes that may arise out of retroactive amendments because let us not forget, we have had two dozen of them last year and thse assesses may seek to settle under treaties. Would they also then need to be extended a similar conciliatory framework?

Datar: If it is a consent term then, for example, apart from Vodafone let us say ‘X’ limited is aggrieved by retrospective amendment and it is a foreign investor which is residing in a country where there is a bilateral investment treaty and it invokes the treaty. Now Vodafone has invoked it on the grounds of unfair treatment and expropriation. So, if a similarly placed company invokes its investment treaty, once again the Union of India has to either contest the arbitration proceedings or come to a settlement and have an award by consent term. If they settle it for Vodafone, it is not necessarily they have to settle for others also but they will find it difficult to say no to other companies which may also invoke such bilateral investment treaties. But the important point is if you go the investment treaty route and it is an award on consent, then you may not have to amend the Income Tax Act because it is an award binding on the Union of India.

Doshi: Do you think this is going to through the treaty route or do you think this is going to result in an amendment of the Income Tax Act.

Shah: Two or three things. Firstly, I don’t know if this is about reducing the amount of tax. I think while legally we have all agreed that there should be no penalty- legally we are saying it would be wrong for there to be an interest. I don’t think that is a done deal. I think today these amounts still remain as outstanding against Vodafone and I am not so sure that this is going to be about reducing the main tax demand itself. As to how they can go about this- the whole issue of interest and penalty- in my view it is very possible. There are Circulars for the DEPB and DFRC and the Circular has secured a waiver of both interest and penalty. Recently in service tax and retrospective amendments they have used the legislative route to wave the penalties. 

Doshi: If they can waive tax, if they can waive the interest and penalty through various different routes as you have just described then what is this conciliation about if not the principal amount.

Shah: The situation here is, this conciliation why does it need to go to the parliament- I think that is what is engaging people. Now, if the situation is that you have to work with the basic tax demand then do you need an amendment or do you need amendment to section 9 or do you need an amendment in the form of empowering the government to settle. If their situation is that they are trying to do something only specific to Vodafone, then the situation is they will want the empowerment route and somewhere to distinguish themselves in this case from others, the settlement or the conciliation will record the background of a Supreme Court order.

Doshi: Can they even do that? Can they do something only for Vodafone? Would that be fair? What about the other companies that have been impacted- not just by the retroactive amendment to Section 9 but all the other amendments that took place last year?

Shah: Break it up in to three parts again which is tax, interest, penalty. If they make an amendment in the context of saying no interest and penalty, everyone similarly situated to Vodafone would get this same benefit and it meets the Section 14 and Section 19 etc. If you go into a situation of saying – I now want to impact the tax amount itself, then in that particular situation, it goes to a very case-by-case approach. What do they need if they want to effectively impact the tax amount- they need a right to negotiate and to settle. That will happen in the background of Vodafone’s case and one of the key facts in background is that they have a Supreme Court order. So, the situation is if they do something to Section 9, it applies across the board. If they take a right to settle on a case-by-case basis, then what you can formulate in each case is different and to that extent what they may formulate in Vodafone, given all the facts and background, will maybe very different and does not automatically apply to everyone impacted by retrospective amendment. 

Rohan Shah Says
Govt may prefer to amend law to waive interest/penalty
Govt may seek parliamentary nod for case by case settlement

Dalal: I just want to address one more issue which is I can’t see any provision that can be made in the Income tax Act to say the government can reduce a particular amount because that could open another set of issues not only for these kind of cases but generally. So, I think either under a stretch of the Conciliation Act or under the BIPA is the only way, that at least I see a settlement amount can be arrived in so far as the principal amount is concerned. 

Datar: If you go by the bilateral treaty, then there is no need to amend the law but if you were to go by this non-conciliation route, you have to necessarily amend the Income Tax Act and put a mechanism in place because you just can’t make a law only for Vodafone. How it is going to pan out is you will have to take all those cases not only in Vodafone, not only in 2012 amendments but in future if there is any retrospective amendments and they give rise to tax liability with penalty and interest backwards, then there must be a mechanism where party can go and say look I am willing to pay 60-70 percent of the tax amount on condition of waiver of penalty and interest. There have to be set of rules and regulations to do that because if you have settlement only for Vodafone I am also expecting a large number of PILs to crop up saying that you can’t do this and so on and so forth. 

Shah: My sense is that they have two approaches. Either they look at investment treaty route which allows them to tell us something specific to someone covered by the treaty or they have to bring in either amendment or Circular which secures three things. A clear waiver of penalty, a clear waiver of interest and if they desire to limit the tax demand one approach is to say that their demand can only go back x number of years in which situation they are able to, in some form or manner, restrict the quantum of the tax which could be collected. But doing something too complex runs the risk of your getting caught up either in the parliamentary debate or in a new stream of litigation on the ground of discrimination. They will have to keep it simple but if it has to appeal to the international community which is what they want then interest and penalty must go for sure. 

Doshi: Why do you need an amendment of the law for that? You can just do that through a Circular, you don’t need parliamentary approval, right?
Shah: You could but even if one looks in the past they have adopted either the Circular route under Section 119 or they have adopted a legislative route.
Dalal: I do want to make one point on what Rohan said, which he said restricting the number of years. I don’t think that can fly really because what has happened is there are 28 retrospective amendments in the Finance Act 2012 itself. So anything to try and do it specifically to address this kind of issue may have larger ramifications. 

Dattar: One formula could be to put an end to this kind of saying is that in case there is a retrospective amendment they can have a rule that if you are willing to pay the tax demand within three months or six months then government can wave away 50 percent of the liability. There could be some ready formula towards litigation. 

Shah: Some variation of that is already in the voluntary disclosure type of scheme that they have in service tax. They dictate time frame then they give you some facilitation for that.