Indian Tax on Indirect Transfers of Shares: The Decision of the Indian Supreme Court in Vodafone and India’s Proposed Retrospective Counteracting Legislation

Sullivan & Cromwell LLP - May 4, 2012

On 20 January 2012 the Indian Supreme Court found that India had no basis to tax the sale by a non-Indian subsidiary of indirect interests in an Indian telecoms company, Hutchison Essar. The Indian Tax Office argued that the gain accruing to the seller should be subject to tax in India because the gain arose from an “Indian source”, and that the Dutch purchaser (a subsidiary of Vodafone) should therefore have withheld an amount in respect of Indian tax from the purchase price. The Supreme Court disagreed on both counts.

On 16 March 2012 India announced plans to make retrospective changes to the law that would effectively reverse the decision of the Supreme Court and allow India to tax non-residents on gains arising from the disposal of indirect interests in Indian businesses, potentially as far back as 1962. The changes include an obligation on a non-resident purchaser of interests in Indian assets to withhold an amount in respect of Indian tax. The government has also proposed a broad general anti-avoidance rule.

The proposals have met with widespread criticism. Governments and industry bodies are lobbying the Indian government to reconsider.