Vodafone will get a lifeline from Retrospective Tax Withdrawl

Key Players in the Indian Telecom Industry

 

Vodafone Tax Issue Timeline

   

 Indian Govt Decision on Retrospective Tax 

   

Key Issues and Arguments

• Vodafone acquired Hutchinson/Idea/Max in 2007 - 67% share by $ 11Bn
• Hutchinson Vamco based out in HKG sold 67% of shares driven by assets in India
• Indian Tax Department called out that Vodafone has to pay Capital gains Tax (calculated as Rs 7K Crore in 2007, today its Rs 20K Crore liability)
• Vodafone said the transaction was made by 2 foreign entities (Hutch/Vodafone) in a tax heaven country
• When challenged by the Tax department, Vodafone went to the Supreme Court  (SC) and won the case by saying that assets transferred in a foreign country can be taxed
• FM Paranb Mukherjee was hurt (probably ego) by this SC ruling and hence he applied his power in govt and legislation to circumvent the SC ruling and prevent the tax from backdating retrospectively

Removal of Retrospective Tax by the Indian Govt. will give a lifeline to Vodafone India which is struggling financially in a JV with Hutch/Idea. The tax was ill-conceived by FM Paranb Mukjherjee even though it was opposed at the time by PM Manmohan Singh and his cabinet colleagues like P Chidambaram and Kapil Sibal (law minister) in 2007. The tax was imposed from the backdate (can claim nearly 60 years) after Vodafone won the case in the Supreme Court (as described by Shekhar Gupta from ThePrint). By rolling out the retrospective tax FM exercised typical abuse of power, intimidation, and legislative superiority to ensure Vodafone falls in line.

Why Vodafone is Indispensable
 
India has few major players in the Telecom sector. The failure of any key player is detrimental to Telecom and is key to India's IT-driven Service Sector. Besides this, it will cause twin balance sheet issues for the financial sector as Indian Banks will lose their invested capital.

For Vodafone India, on the verge of bankruptcy in FY 22, Rs 20K crore liability will give a lifeline and infuse cash to survive in a capital-intensive industry during these challenging times when the demand profile has changed.

In short, this decision by govt is late, but sometimes politics can weaken strong leaders resolute to reform. As Shekhar Gupta (from ThePrint) called out correctly if a mistake goes long, it does more damage, but it needs to be welcomed if it's corrected.

Credit: Shekhar Gupta from The Print, ET, The Hindu, WSJ.

Update on Liability for Vodafone India is around 60K crore, (share price is around - Rs7).  

India's telecom sector is mismanaged by bureaucrats and is destroyed by some of the ludicrous policies on taxation like AGR for spectrum. The amount of money owed to govt and bank by 3 telco companies (VI, Airtel) is around 1Lakh crore. Govt needs to assist this sector which has laid the pathways for the future. Time is running out before it's too late.