January 29, 2015 / 9:18 AM / 4 years ago

After Vodafone, India changes tax rules to boost investment

MUMBAI (Reuters) - The Indian government has asked tax officials to apply the principle behind a tax ruling in favour of Vodafone Group Plc(VOD.L) to all similar cases, a major boost to foreign firms including Royal Dutch Shell PLC (RDSa.L).

A Shell logo is seen at a petrol station in London January 31, 2013. REUTERS/Luke MacGregor/Files

The order was detailed in a letter seen by Reuters and sent by the finance ministry to all tax officials across the country on Thursday.

India’s image as an investment destination has been tarnished by a reputation for red tape, unpredictable rules and a tax office long seen as over zealous in its pursuit of foreign companies with billions of dollars of demands.

Prime Minister Narendra Modi’s government, which stormed to power in May on promises it would reboot a slowing economy, has sought to change that.

Tax lawyers said they expected the government order to impact all the past and future cases involving tax on shares issued by a company to related entities — the heart of the Vodafone case.

The order came a day after the government said it would not appeal a Bombay High Court ruling in favour of Vodafone in a long-running dispute under which the taxmen had accused a unit of the British telecoms firm of under-pricing shares in a rights issue.

“In view of the acceptance of the above judgement, it is directed that the ratio decidendi of the judgement must be adhered to by the field officers in all cases here this issue is involved,” said the letter from the finance ministry, using a Latin phrase denoting the rationale behind the ruling.

The decision will also bring relief to Shell, which won a favourable ruling in the Bombay High Court in November after it challenged the largest ever claim in an Indian tax case related to transfer pricing.

Transfer pricing is the value at which firms trade products, services or assets between units across borders, a regular part of doing business for a multinational.

TAX FIGHTS

The Indian government said in 2013 that 27 companies, including units of HSBC (HSBA.L), Standard Chartered (STAN.L) and Vodafone, underpaid taxes in the fiscal year 2011/12 after they sold shares to their overseas arms too cheaply.

While latest figure on the companies facing such charges are not available, tax lawyers said tax demand worth billions of dollars have been issued in the last couple of years in transfer pricing cases to multinational as well as local firms.

Most of these cases are at various stages of litigation, they said, adding cases such as those involving IBM (IBM.N), Microsoft Corp (MSFT.O), Sony Corp (6758.T), India’s Essar Group and others could now be resolved instead through negotiation.

Vodafone has been involved in a string of tax disputes in India. The Bombay High Court in October ruled in its favour in the share issue case, and the attorney general recommended the government refrain from appealing.

On Wednesday the government heeded the recommendation, just days after Finance Minister Arun Jaitley reassured investors that India would review its past, “adversarial”, tax policy.

A spokesman for Shell declined to comment. IBM, Microsoft, Sony and Essar were not immediately available for a comment, while Standard Chartered and HSBC declined to comment.

Additional reporting by Clara Ferreira Marques and Rajesh Kumar Singh; Editing by Vincent Baby

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