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.