Indian Supreme Court decision in Vodafone tax case good news for international investors in India

The judgement of India’s Supreme Court on 20 Jan in the Vodafone tax case, removes (at least for now) some of country-specific risk that has been holding back investment by multi-national companies in India. Reduction in perceived risk is likely to encourage more investment in India by multi-national companies, particularly as Indian growth is driven to a greater extent than many other economies by domestic demand, and so is less correlated with a Euro-zone slowdown (or, if things go really badly, Eurozone plummet).

In good lawyerly fashion I should start with a disclaimer – I am neither an Indian lawyer, nor a tax lawyer so anyone wanting to explore the finer points of Indian tax law should look elsewhere (a number of Indian law firm have produced useful detailed case notes).

At a business level the facts were very simple – the Indian tax authorities sought to levy tax on Vodafone in relation to its acquisition of an offshore company. The detailed arrangements were rather complex, and the tax authorities sought to ignore the corporate structure and to tax Vodafone as if it had directly acquired an interests in the underlying Indian telecoms business. The Indian High court supported the position of the Indian tax authorities, but this was decisively rejected by the Supreme Court.

For me, what stands out is not the finer detail of the legal analysis, but an appreciation by the Supreme Court of the requirement for legal certainty as a pre-requisite for international investment. In the concluding words of the Lord Chief Justice:

“FDI [foreign direct investment] flows towards location with a strong governance infrastructure which includes enactment of laws and how well the legal system works. Certainty is integral to rule of law. Certainty 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. Legal doctrines like “Limitation of Benefits” and “look through” are matters of policy. It is for the Government of the day to have them incorporated in the Treaties and in the laws so as to avoid conflicting views. Investors should know where they stand. It also helps the tax administration in enforcing the provisions of the taxing laws.”

This approach is refreshing and welcome to international investors. With India’s economic growth powered to a greater extent that other developing economies by domestic demand, I expect to see more investment.

Lenders over-exposed to real estate move into TMT

I was lucky enough to chair Olswang’s semi-annual CPD catch-up day for in-house lawyers today. It was a very interesting set of talks (for those who are interested I commented using twitter, see: #olswangcpd), which covered a wide range of topics:

Session Speaker

Employment update: the latest red tape changes and other hot topics
(Daniel Aherne, Partner, Employment)

Daniel Aherne

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Commercial tax update post Finance Bill 2011
(Natalie Coope, Senior Associate, Tax)

Natalie Coope

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Dispute resolution: What are my options – which one should I choose?
(Anna Caddick, Associate, Commercial Litigation)

Anna Caddick

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Bribery Act 2010 – When? What? Why?  A practical look at what businesses need to do to comply
(Steven Corney, Partner and Oliver Gayner, Associate, Commercial Litigation)

Steven Corney
Oliver Gayner

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Click for Practice Note

Hot topics for borrowers: what increased regulation means for you (including the cost of borrowing, Basel III and accounting for leases)
(Charles Kerrigan, Partner and Jane Innes-Jones, Associate, Finance Group)

Charles Kerrigan
Jane Innes-Jones

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Social media marketing and the law: an overview of the relevant legal principles and risks,  including the new ASA CAP Code provisions effective from 1 March 2011
(Ashley Hurst, Senior Associate, Media Litigation)

Ashley Hurst Click for Slides

Commercial boilerplate quiz:  a practical look at recent case law developments and how these impact on day to day drafting
(Rob Bratby, Partner and Claire Walker, Head of Commercial Know How, MCT)

Rob Bratby
Claire Walker

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Click for Guide

Convergence: does it add up?  Highlights from Olswang’s 2011 Convergence Survey
(John Enser, Partner, MCT)

John Enser

Olswang Convergence Survey 2011

Rather than attempt to summarise everything, I thought I’d pull out from the morning a couple of take-away issues that impact telecoms and technology.

The first was the observation that as banks were diversifying their lending books that some banks with historic over-exposure to real-estate were nevertheless open for business to borrowers from the TMT sector. The second was the impact of the extension of the CAP code to social media – the full impact of which has yet to play out. The final thought was the continued life of linear TV programming – isn’t it interesting that although technology may enable us to watch whatever we like, whenever we like, human psychology still prefers watching programmes with friends so you have someone to chat to?

UK Budget doubles lifetime limit for entrepreneurs’ relief

The Watcher is not a tax lawyer, so (he suspects much like others) he relies on helpful summaries to navigate the impact of yesterday’s budget. Some of his partners spent yesterday live blogging and tweeting about the budget (@olswang, #budget 11). Whilst this blog tends to focus on some of the larger technology and telecoms companies, a significant amount of innovation and wealth creation occurs within a tier of somewhat smaller companies. Those companies, and their owners and managers, often accept higher levels of risk than managers within larger organisations and it is important that the tax system permits and encourages appropriate levels of reward.

As blogged on by Michael Deeks,  and summarised by Natasha Kaye:

‘One aspect of yesterday’s budget was the increase lifetime limit of gains that can qualify for entrepreneurs’ relief. From 6 April 2011, the lifetime limit will increase from £5 million to £10 million. Since, where entrepreneurs’ relief is applicable, gains are taxed at 10%, as opposed to rates of up to 28%, entrepreneurs’ relief will now be worth up to £1.8 million to individuals that make qualifying gains.

For individuals who have made qualifying gains before 6 April 2011 above the relevant lifetime limits at the time (£1 million from 6 April 2008, £2 million from 6 April 2010 and £5 million from 23 June 2010), no additional relief will be available in relation to such historic gains. However, the balance of the increased lifetime limit will be available to such individuals in respect of future gains.

It is disappointing that the arbitrary requirement to hold 5% of the ordinary share capital in a qualifying company was not relaxed or EMI optionholders were not included, which would have allowed a wider class of employees and directors to be incentivised.’