The government may tell Vodafone its notice under the bilateral investment promotion and protection agreement (Bipa) would be invalid, as the treaty did not cover tax issues.
A finance ministry official said the Bipa specifically excluded Vodafone-like tax transactions under Article 4(4) of the treaty and, hence, the notice served by the Netherlands subsidiary of the British telecom company was invalid. “If taxation issues were covered under the Bipa, there would be no need to sign double taxation avoidance agreements. Bipa is mainly aimed at ensuring fair and equitable treatment for foreign investors, as it is given to domestic investors, and such foreign investments are not nationalised,” said the official.
Contacted by e-mail, Vodafone said, “The treaty explicitly applies to indirect investments and our transaction, therefore, is clearly one which qualifies for treaty protection. Vodafone believes if the retrospective tax proposals were enacted, it would amount to a denial of justice and a breach of the Indian government’s obligations under the BIT with the Netherlands to accord fair and equitable treatment to investors.”
However, paragraph 4 of Article 4 says the provisions of the treaty “in respect of grant of national treatment and most-favoured nation treatment shall not apply in respect of any international agreement or arrangement relating wholly or mainly to taxation.”
The official added since the deal was signed in Cayman Islands and did not bring any foreign direct investment into India, the India-Netherlands Bipa could not be evoked.
On Tuesday, Vodafone’s Dutch subsidiary, Vodafone International Holdings BV, had served a notice of dispute to the Indian government, asking it to abandon or amend retrospective aspects to the proposed Finance Bill 2012 or face arbitration proceedings. Finance ministry officials termed the move as “premature” and based on assumptions.
Though the Finance Bill proposals are yet to be cleared by Parliament, indications are the government would stick to its stand and not roll back the proposals in spite of pressure from Vodafone.
