Vodafone Essar Case

 [Economy] Vodafone Essar Case: Capital Gains Tax Meaning, Reasons, Timeline, Implications explained

Two types of Taxes:

Indirect Taxes:

is paid by rich and poor alike, on the purchase of goods and services. Sale tax, excise duty, custom duty, entertainment tax and examples of indirect tax.

Direct Taxes: 

Is paid by middle class and rich men on their income and property. Income taxes, corporate tax, Wealth tax, capital gains tax, are examples of direct tax. Direct taxes collected by the income tax department

What is capital gains tax?

First, What is capital?

·        Capital is something that generates income for you. It can be a building, it can be a rickshaw, it can be a truck, it can be printing press machinery

·        When you sell these capital assets, and IF you make profit (gain), then you have to pay tax. This tax is known as capital gains tax.

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There are two types of capital gains tax.

• Short-term capital gains tax, if you owned that asset for less than 36 months, before selling it.
• Long-term capital gains tax, if you owned that asset for more than 36 months before selling it

Do Shares of a company also come under Capital Gains tax?
Yes Shares of a company also come under Capital Gains Tax. And there is different ‘time-frame’ for them. 

• Short-term capital gains tax, if you owned those shares for less than 12 months, before selling it
• Long-term capital gains tax, if you owned those shares for more than 12 months before selling it.

Who pays the Capital Gains Tax?

Who is to pay CGT? The seller or the buyer?

• Suppose I own a shopping mall building worth Rs.1 crore and
• I sell it to you for Rs.2 crores, and thus I made the profit (Gains) of Rs. 1 crore and I have to pay Rs.10 lakh to the government as capital gains tax. Now the convention is that I (the seller) don't actually pay Rs.10 lakh by myself
• Instead of that, you just give me only Rs.1 crore 90 lakhs. And keep aside 10 lakh rupees.
• Then, you (the buyer) will pay the 10 lakh rupee to the Government on my behalf. (Thus you purchased the mall for Rs.2 crore).
• This is the concept of Tax Deduction @Source (TDS)

So in the case of Vodafone: indeed Hutchison was the seller so he has to pay the Capital gains tax but he doesn’t ‘actually’ pay it. It is for the Vodafone (buyer) to deduct that tax money from his payment and give the tax to Indian Government.That’s why IT Department harasses Vodafone and not the Hutch.
Now coming to the Vodafone Essar case

Players in the Vodafone Case

Vodafone	UK based Telecom company.
Hutch	Hong-Kong based company.
Hutchison Essar Ltd. (HEL)	India based company
CGP Investments Holdings Ltd	Cayman Island based company, has 67% stakes in Hutch-Essar India. CGP itself is owned by Hutch, Hong Kong.
Income Tax dept.	India based *insert whatever word you want*
Innocent Bystanders	You and I, because we’ve to prepare such topics for competitive exams.

    Timeline of Events

December 2006: Hong Kong

Hutchison Telecommunication International Ltd (HTIL) Boss: My Indian arm “Hutchison Essar Limited (HEL)” is not making good money. I want to quit from India.

(To his Secretary ) as you know, I own CGP Investments Holdings Ltd, located in Cayman. And CGP holds 67% in HEL (India). So, just make an announcement that I want to sell CGP and start talking with prospective buyers.
Secretary: but why all this complex procedure?
HTIL boss: oh come on man, don’t you know that Cayman Island is a Tax Haven. They don’t have Capital Gains Tax! Better we sell via Cayman route and we’ll save a truckload of ca$h in tax.

February 2007, London

Vodafone (UK) Boss: (To his Netherland subsidiary manager) Take these suitcase full of 11 billion US Dollars, go to Cayman Island, buy that CGP holdings Ltd. From HTIL (Hong Kong) and give me “miss call” when the deal is finished.

March 2007, Mumbai 

Income Tax Commissioner’s Office.

Minister (on Phone): Mast bakraa haath mein aayaa hai (मस्त बकरा हाथ मे आया है!). Send a notice to Vodaphone, ask them to pay Rs. 12000 crores under capital gains tax because they purchased an Indian Company HEL (Hutch Essar Ltd) for 11 billion dollars!
IT Commissioner: Sir, may I humbly point it out that It is a common practice among multinational companies (MNCs) to establish such SPV (Special purpose vehicles/ flimsy companies) in Tax havens of Mauritius / Cayman Island.
And then those flimsy companies (SPV) like CEG hold shares in an Indian company (HEL).
When the MNC wishes to sell or acquire an Indian company, they don't directly come and buy in India, they simply purchase or sell the shares of these flimsy companies in Cayman's Island because the transfer of shares of an SPV outside India, is not taxable in India. And Cayman Island itself has very negligible tax rates. It is a win win situation for them.
And This is not the first case, there have been truckload of merger and acquisitions like this, in past and we've never sent any notice to such companies. This matter is outside my Jurisdiction sir.
Minister: Betaa, don’t give me this “GYAN” (ज्ञान), get me some “CASH” ! I've to give Rs.71,000 crores in debt-waiver scheme to farmers in 2008 to win the General elections.

• We are giving billions of rupees in subsidies on diesel, LPG, Kerosene, Fertilizers.
• We've to pay crores of rupees to Government employees under 6th Pay Commission.
• We're running Development schemes like MNREGA (Rs.40,000 crores a year), and in future we are thinking of starting Food security Act (2 lakh crores a year). Where is the money to pay for all this?
• I've to give crores to that loss-making Air India.
• I've to pay Rs.28000 crores Common Wealth games arrangement.
• All these things requires huge huge huge cash, man. Money doesn't fall from sky. We cannot tax the aam-aadmi beyond a level and
• We couldn't get decent money from sale of 2G spectrum, or coal mines auction
• Reliance isn't paying much from KG Basin gas exploration.
• Don't you understand? We've to find new 'sources' of income. Vodafone is a good "bakraa". Let's rip him apart.
• Then we use it to create bogus Developmental schemes, siphon off the money and use it to fight election. This shall help us get absolute majority in Bihar and Uttar Pradesh because Public of UP and Bihar is so Gullible they will vote for anyone who tells them ki “hum aap ke liye Delhi se paisa bhejte hai!(हम आपके लिए दिल्ली से पैसा भेजते है!)

IT Commissioner: as you wish. I’ve sent the notice to HEL (India).
Minister: Mogembo khush hua. (मोगेम्बो खुश हुआ)
HEL(India) Boss: (To IT Commissioner) Why the hell are you sending notice to me? I am not a party to any of this! Don’t you see I’m getting ‘sold’ here. Ask the buyer Vodafone of UK or the seller Hutch of Hongkong about your Capital gains tax!

In the mean time

Vodafone International boss: (To HEL Boss): I’ve purchased majority shares of your company. You shall take my name like an obedient wife. From this day on, you shall be known as VEL (Vodafone Essar Limited) and not HEL (Hutchison Essar limited).

HEL boss: as you wish my lord. Mr. HEL transforms into Mr.VEL.
IT Commissioner: caught you now! Mr.VEL, you're the Indian agent of Vodafone, now you pay the capital gains tax or I'll start your ragging worst than that in B.J.Medical College, Ahmedabad.
Vodafone files appeals in Bombay highcourt and supreme-court, stay orders here and there, sometimes victory sometimes defeat
Fast-forward to

Sept 2010

Bombay HC: Yes IT Department is right. Mr. Vodafone you’ve to pay the Capital Gains Tax.

Mr.Vodafone: I’ll go to supreme court.
Leftist Media: Shame shame. You’re going to Supreme Court!! We are going to report this as in such a tone as if you’re the main culprit here and doing something immoral.
Mr.Vodafone: When the kinds of Shibu Soren, Sanjay Dutt and Vikas Yadav can goto Supreme court, why can’t I? Saving tax is a legal activity. I’ve done nothing wrong. I’m the innocent bystander here. You don’t have the guts to cover blackmoney issue until Anna Hazare and Baba Ramdev raised it, but just because I’m a rich MNC company I must be the bad guy, right? All you mediawalla want, is money to keep your mouth shut.

Aug-Oct 2011

Location: Supreme Court, Delhi 

IT Commissioner: Your Honor, this Mr.Vodafone here, has purchased ownership of an Indian mobile company called HEL (Hutch Essar Limited) for USD 11 billion and now he is not giving me Rs.12,000 crores as Capital Gains tax.
Mr.Vodafone: Get your facts right Commissioner Gordon. Please see this diagram again.

January 2012

Landmark Judgment of Supreme court

Saare sabuto aur gawaaho ko madde nazar rakhte hue, ye adalat iss natije par pahuchi hai ki (सारे सबूतों और गवाहों को मद्देनजर रखते हुए, ये अदालत इस नतीजे पर पहुची है की)

• Indian authorities do not have jurisdiction on an overseas transaction.
• Certainly and stability form the basic foundation of any fiscal system. Tax policy certainty is crucial for taxpayers (including foreign investors) to make rational economic choices in the most efficient manner
• This offshore transaction evidences participative investment in India and not a sham.
• The demand of nearly 12,000 crore by way of capital gains tax, in my view, would amount to imposing capital punishment for capital investment since it lacks authority of law and therefore stands squashed.

Location: Finance minister’s Office, Delhi

There is pindrop silence in the office. Babus are not even playing that "Solitaire/Hearts" card-game in their Windows 98 computers. 

Some of them are busy in toilet, actually leaking information about 'possible future-moves of their minister' to their journalist friends in TimesNow, via SMS from their Antique Nokia-1100 mobile phones.
Minister (entering the Office) : Itnaa Sannaataa kyo hai bhai? (इतना सन्नाटा क्यों है भाई?)
IT Commissioner: Because We have suffered a humiliating defeat in Supreme court, in that Vodafone case.
Minister: You mean as humiliating as Team India’s defeat in Austrialian test-matches?
IT Commissioner: Well, not *that* humiliating, but still very humiliating.
Minister: I cannot let this matter go. Rs. 12000 crores is not a small amount! I've Gujarat Assembly elections ahead, I need the ca$h! Gang up the best tax-lawyers, study the judgement and File a review petition in Supreme Court again!

March 2012

Supreme court rejects the review petition.

Those Best Tax-lawyers demand lakhs of rupees as consultation fees from Government of India.
IT Commissioner (to self): Khaayaa piyaa kucchh nahi, glass fodaa…. (खाया पिया कुछ नहि, ग्लास फोड़ा..)

Budget 2012

Minister (announcing in Parliament): I propose an amendments in the Income Tax Act with retrospective effect from 1962 so that all persons, whether residents or non-residents, having business connection in India, will have to deduct tax at source and pay it to the government 

even if the deal is executed on a foreign soil!
With this ‘move’, I’m trying to get around the court’s decision which said that

the government cannot tax a deal between two foreign entities, even if the transaction includes an Indian asset.

     Our party has ‘history’ of trying to outsmart judiciary, whether it was Shah Bano case or 42^ndConstitutional amendment or….
Random MP: (putting his i-pad aside) What does this “retrospective effect” mean?
Peon: Retrospective effect means if Government passes such law in 2012, still the past deals between companies made in 2007 can be taxed. Only Civil laws can be made with retrospective effect. But criminal laws cannot be made with retrospective effect.
Random MP: Elaborate
Peon: Criminal law cannot be made with retrospective effect, meaning if in 2012, Government passes a law that mobile phone thieves will get life time imprisonment, then only those thieves who’re caught in 2012, after the commencement of that law, will be jailed for lifetime.
But, If a thief stole the mobile phone in 2007, he cannot be given lifetime imprisonment, he has to be tried under the punishment provision that were in effect during that time. On same logic, people are still languishing in jail under TADA and POTA cases, even though those acts are scrapped now.
Random MP:That means I must hurry and do as much corruption as I can, before that Lokpal thing comes in effect, Whaat an idea Sir-ji.

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