India: multinationals in the spotlight as officials get tough on tax


February 18, 2013

Pia Heikkila, International Bar Association

Mumbai, February 18, 2013

Multinational corporations such as Vodafone, Shell and Nokia are rarely out of the business pages as the Indian tax officials seemingly never-ending chasing of unpaid taxes gives daily fodder to the Indian press.

But, while it’s tempting to lump all three companies’ cases together under the headline ‘unpaid taxes’, each is, in fact, very different.

Take Shell, the Anglo-Dutch fuel giant. Indian tax officials are claiming unpaid taxes of over £1bn over an equity infusion undertaken four years ago worth £120m. The tax authorities are claiming that Shell underpriced its shares and as a result paid less tax on the internal shares transaction.

Shell India has described the demands as ‘absurd’ and says it will challenge the notion that alleged tax evasion is done by underpricing share transfer between member firms. ‘We do need the right signal that India is going to be a stable fiscal, legal, tax regime. We are not going to have surprises along the way,’ said Yasmine Hilton, the India Head of Royal Dutch Shell in a report by Firstpost.

The Finnish handset maker, Nokia, however, has come under fire for an entirely different reason. Nokia, the Indian tax department alleged, has violated the country’s transfer pricing rules. According to unanimous sources in the local media, Nokia’s case is related to tax payments the company made for supplying software from its parent company in Finland for devices produced in India.

Nokia India objected to officials entering its factory in Chennai, one of its biggest facilities and described the incident as ‘excessive, unacceptable and inconsistent with Indian standards of fair play and governance’.

Vodafone, on the other hand – the world’s largest mobile operator – is fighting a case over paying taxes of nearly £2bn on its 2007 majority stake buy in a local telecom company from Hutchinson. The company is also facing a charge from Indian authorities for underpricing an issue of shares of its Indian unit to a Mauritius-based group company by about INR 13bn (£200m). But Vodafone is fighting back and denies the charges.

These cases have one thing in common: the tax is being collected on transactions retrospectively. It seems, the experts say that India has gone on a hunt for unpaid taxes to boost its coffers. ‘With the slowdown of the global economy – and, more so, the Indian economy – tax collections in the country have been below estimates. Further, with rising concerns over the fiscal deficit scenario, every attempt is being made by the tax authorities to shore up tax collections to bridge the gap,’ said Girish Vanvari Partner and Co-Head of Tax at KPMG in Mumbai.

It could look like a witch hunt for foreign of multinationals operating in India. But, says Devangshu Dutta, CEO of Third Eyesight, a specialist management consultancy firm, ‘there is valid reasoning behind the government’s stand that for value gained on assets that are primarily in India, tax should be paid in India, and should not be avoided/evaded purely through offshore corporate structures that have no inherent value of their own.’

The lines between what is tax evasion and what is tax planning appear increasingly blurred today. ‘Each country should have their own rules but ultimately the idea is that you should pay appropriate taxes within the framework of law in that country,’ said Vanvari. ‘There is global trend by each country to increase their tax bases by taxing the superrich, transfer pricing adjustments, off shoring taxes and so on. Transitioning into these new concepts especially for years gone by is leading to debates, chaos and confusion.’

But continuing tax debacles can seriously tarnish India’s image and alienate foreign investors and companies alike. ‘Retrospective changes such as this affect the image of India as an investment destination not only in the eyes of foreign investors, but domestic investors as well,’ said Dutta.

Business leaders say there is much more to be gained from creating a policy environment that allows entrepreneurial and social energy to be unleashed – rather than be subjected to a constant barrage of rules and regulations.

Sadly, however, these cases and other tax-related litigation are not going to disappear any time soon experts warn.

‘However good or bad the case is, legal battles in India usually tend to be long. Once a tax demand is raised, a portion of the same needs to be deposited whilst litigation is ongoing,’ said Vanvari.

Ultimately India is still trying to get to grips with its own speed of change. But the government should be wary of sending out the message that it can bend the law at will. ‘In that environment, business and non-businesses that can contribute to positive changes and growth feel stifled and don’t do enough to achieve their own fullest potential, or otherwise they just move to another jurisdiction where they can,’ Dutta noted.

(This article appeared on the website of the International Bar Association on February 18, 2013.)