Cayman 1, Taxman 0

Vodafone has scored a legal victory over India’s tax authorities, but what’s worth  asking is this: why do ‘capital gains’ bear a lighter tax burden than your salary?

Matters of taxation rarely ever get people worked up in India, unlike the US, where tax rebellion is often confused with common sense and slogans like ‘Read My Lips, No More Bush’ are the stuff of political instead of Brazilian wax campaigns. Yet, the 20 January judgment of India’s Supreme Court letting Vodafone off the hook for the Rs 11,000 crore it allegedly owed India’s Revenue Department has dismayed more than just Leftists who like raiding the rich.

In 2007, the Dutch unit of telecom multinational Vodafone bought a majority stake—67 per cent—in the Indian telecom firm Hutchison Essar from Hong Kong-based Hutchison Whampoa for about $11.1 billion. India’s tax authorities saw this as a purchase of domestic assets, and slapped Vodafone with a capital gains tax bill of about $2.2 billion for the deal, money that it said the buyer was supposed to deduct from the seller’s bounty for the profit made by it. However, there was a cup-n-lip slip: the shares that Vodafone got from Whampoa were of a holding company based in Cayman Islands called CGP that owned Hutchison Essar in India, and so, as the Supreme Court has ruled, the deal was beyond the jurisdiction of Indian taxes. The Government argued that it was an ‘indirect’ transfer of Indian assets and thus subject to domestic taxes. But an offshore deal is an offshore deal, goes the letter of the law, and that’s that. Deal with it.

Some have hailed the ruling as good news for foreign investment; the Judiciary has proved its independence in keeping the State from imposing itself on a deal beyond its legal reach, they exult. But many others are aghast; the globalised have been proved right in strutting around the arena as alpha players, they fume.

Is it just the globalised that are living it up, though? In a ‘socialist’ country that takes up to one-third of every salaried employee’s earnings away as income tax, it is worth asking why only one-fifth needs be coughed up on capital gains. This, after all, is how most megabucks are made, and that too without much hard work or obvious talent. Sure, some ‘capitalist’ exemptions do serve a truly valid purpose: on dividends, for example, since corporate tax is paid on those profits anyway; and on long-term capital gains of equity shares, a tax exemption that encourages household savers to turn into retail investors, a shift India sorely needs. But when megacorps trade multibillion dollar assets at multibillion dollar profits without paying tax (not even the easily-bearable 20 per cent), the last thing one can wax eloquent about is justice.

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Aresh Shirali