India Draws Flak for 'Tax Terrorism' for Sending CK Hutchison Tax Bill of $5Bln

Stung by the court order that offshore deals could not be taxed, the previous Indian regime had changed the laws for taxing indirect transfer of assets. Hutchison and Cairn, facing tax demands in millions of dollars, have dragged the Indian government to the International Arbitration Court, alleging ‘tax terrorism.’

New Delhi (Sputnik) — Indian tax authorities have slapped a fresh penalty on Hong Kong-based CK Hutchison Telecommunications International Ltd (HTIL) for withholding the tax amount it allegedly ought to pay for the capital gains it made while winding up its telecom business in India by selling it off to British telecom major Vodafone Group, a decade ago. The total amount of tax, interest, and penalty now amounts to approximately $5 billion.

Indian tax department has been claiming that HTIL ought to pay taxes for the profit it made in the decade-old $11 billion offshore deal. HTIL received a tax demand from India in February this year. However, HTIL continued to dispute the tax claim, arguing the deal did not attract taxes in India under the then tax regime.

On Monday, HTIL informed the Hong Kong stock exchange that it had received a penalty order from Indian tax authorities on Aug. 9. "The order issued by the income tax is on the basis of retrospective legislation seeking to overturn the judgment of the Supreme Court of India in January 2012, which ruled that the acquisition (by Vodafone) was not taxable in India, are in violation of the principles of international law," company said in its filing.

The case is related to A 2007 deal when Vodafone had purchased a Cayman Islands-based investment firm that controlled, via other offshore entities, a 66.9848 percent stake in Hutchison Essar Ltd. Immediately after the deal, Indian authorities had asked Vodafone to pay tax but company fought the claim and went to Supreme Court of India. In 2012, the court ruled that Indian government could not tax the company as the transaction was not done within the Indian Territory. Stung by that defeat, in 2012, the previous regime under Manmohan Singh changed the tax rules retrospectively, giving power to the government to impose a levy in cases of indirect transfer of assets.

Narendra Modi had promised to industries that it would do away with such taxation policy if he came to power, but the promise remains unfulfilled at large. Another foreign firm facing what it calls ‘tax terrorism' by India is the European firm Cairn Energy for the Cairn — Vedanta Plc deal where Vedanta paid a dividend to Cairn for its 5 percent Indian business sale. Both Cairn and Vodafone have dragged the Indian government to the International Arbitration Court.