Government Recalls Retro Tax: Here's How it Affects Vodafone Idea

On Thursday, the Finance Minister Nirmala Sitharaman brought The Taxation Laws (Amendment) Bill, 2021 in the Lok Sabha. This amendment will seek to exorcise the ghost of retrospective taxation, which has haunted the government since 2012. At least two companies will benefit greatly from the move; Cairn Energy, and Vodafone Group, both of whom previously owed the government a collective over $3 billion. This has also raised heads at Vodafone Idea, which has been struggling ever since its inception in 2018.

Of course, given such a relief, the telco is now looking eagerly at this new development; its shares surged 19% in early trading. However, the question remains for the struggling telco is that how much it stands to benefit from this move; whether that would be enough to keep it afloat is another matter altogether.

Retrospective Taxation - A Blot on India's International Reputation

The law was first introduced by the UPA government in 2012. It stipulated that the government can charge tax retrospectively on capital gains on companies with underlying assets in India. It, controversially, also included a clause that taxed companies who didn't have a direct presence in the country. The move came after the government lost a case to Vodafone in the SC in 2007 after it acquired a 67% stake in Dutch Essar India, via its subsidiary based in Cayman Islands.

After that transaction went through, the Income Tax Department demanded $2.2 billion in capital gains tax, which the company refused. Initially, the Bombay High Court ruled for the government, but the Supreme Court overruled that verdict. After this verdict, the government brought in the retrospective tax.

Notably, a similar timeline appeared with Cairn Energy UK, from whom the government had sought around $1.4 billion under the same. However, both the companies sought international arbitration and won. An international arbitration tribunal in The Hague last year ruled that India's tax claim on Vodafone as incorrect. The court stated that it breached an investment treaty between India and the Netherlands.

Both the results represent a significant blow to India's reputation in the international investor community.  In total, there are about 17 companies that will seek to benefit from this change in stance.

Thursday axing of the law also represents a diversion in India's stance from the UPA government. Amrish Shah, partner at Deloitte India, said, "with the proposed changes, the Indian Government has not only stood ground on not introducing retrospective tax amendments but also dealt with the major one that was existing and not appreciated by the investor community. This will bring a lot of stability in the minds of foreign investors looking at investing in or entering India for the long run".

Will Vodafone Idea Benefit From All This?

The government has offered refunds without interest to all the companies who have paid the tax for transactions that took place before May 28, 2012. However, it looks like Vodafone will not receive anything from the government. The same is not true for Cairn, though; the British company stands to receive a refund on the payments it has done to the government.

Since the telecom company will not receive any refunds on it - they hadn't paid anything in the first place - it stands nothing to gain from this. In terms of Vodafone Idea, Vodafone CEO Nick Read has repeated the UK group's stance - no more equity for the telco. In an earnings call on 23 July, Read said, “so, I mean, it is…a highly stressed situation, a difficult situation that they are trying to navigate…we as a group try to provide them as much practical support as we can but I want to make it very clear, we are not putting any additional equity into India”.

Basically, the UK telco has said, "it is what it is".

However, as unlikely as it seems, Vodafone might reconsider this stance soon. It is already open to dilute its stake in the telco to convert the debt it has to equity; with the removal of this tax, Vodafone might look at India as a lucrative market again. This is still hypothetical, of course; there is no guarantee Vodafone will now feel more inclined towards putting money in their India business.

A PR Exercise from the Government of India

This move looks like a "landmark move" on paper; and the government is selling it so. However, it shouldn't be overhyped - India had already put itself in a mess by implementing this - and now the BJP government has belatedly gotten rid of it. It feels as if after the fiascos that were the Vodafone and Cairn Energy cases, the government is keen to come clean and disassociate itself from the retro tax.

The government scrapped the tax via an amendment; burying a ghost that have haunted it for the past 9 years. However, it does not have any immediate impact on anyone - well, except Cairn, who will pocket a cool $1.2 billion. Although Vodafone Group remains one of the largest companies involved in the case, it won't get anything out of the move.

It might have spooked investors for 9 years, but now, after the government settles bills worth billions of dollars, things will change.

Although it looks unlikely much will change for Vodafone Idea.