Vodafone has had a major victory in its long-running dispute with the Indian government over tax liability.
The dispute stems from Vodafone’s purchase of Hutchison Telecom’s Indian assets in February 2007. India’s Supreme Court ruled that the Income Tax Department of India had no jurisdiction to tax the transaction since it was between two offshore Cayman Islands-listed entities, and that this was a bona fide and structured means of foreign direct investment (FDI) into India.
Vodafone is to be refunded its initial deposit of $492 million with interest as well as its bank guarantees for $1.67 billion. This verdict is the culmination of a dispute that began in September 2007 with a show-cause notice from the Income Tax Department, and has since progressed through the Bombay High Court and several legal proceedings.
The decision will come as welcome news for Vodafone, which is now free to focus on growing its Indian business. Vodafone has demonstrated its long-term interest in India, making significant investments in its existing 2G network and its new 3G deployments. However, despite its court victory, Vodafone will still face a number of challenges in India, including a difficult operating environment and continuing regulatory uncertainty. The operator must now refocus all of its attention on these challenges.
The Supreme Court verdict also has wider implications. While Vodafone’s victory is being hailed as a welcome precedent that will ease FDI restrictions in India, future investors will need to factor in local tax rules when evaluating investments. Other emerging market governments striving to position their countries as attractive FDI destinations will also take note of this ruling.
Verdict is welcome news for Vodafone, but significant challenges remain
The verdict by the Indian Supreme Court will come as welcome news for Vodafone and its shareholders. As recently as May 2010, Vodafone was forced to write down approximately $3 billion in India as it reeled from the intense price war that had engulfed the telecoms sector. However, through all these difficulties, Vodafone has maintained its long-term interest in India, making significant investments in its existing 2G networks and subsequent large investments in 3G. The company will feel vindicated that the Supreme Court has ruled definitively in its favor, and will now concentrate on growing its business in India.