Vodafone Wins Indian Tax Case, a Credit Positive

Vodafone Wins Indian Tax Case, a Credit Positive

Last Friday, Vodafone Group plc (A3 stable) said the Indian Supreme Court ruled that it had no liability to account for withholding tax on its 2007 acquisition of interests in Hutchison Essar Ltd. (now Vodafone India Ltd.). The favourable resolution of the tax case is credit positive for Vodafone because it removes the threat of a tax bill that could have amounted to as much as $2.9 billion. Non-Indian firms have closely scrutinized the Vodafone tax battle as it sets a precedent on tax liabilities for cross-border acquisitions in India.

The ruling comes nearly five years after India’s tax department claimed that Vodafone failed to withhold taxes on its acquisition of a 67% stake in mobile operator Hutchison Essar for $10.7 billion. The Indian authorities said Vodafone should have withheld the taxes and then transferred the amount to the Indian tax department. Vodafone argued that India did not have jurisdiction because the transaction occurred between two foreign companies, a Dutch subsidiary of Vodafone and a Cayman Islands subsidiary of Hong Kong-based Hutchison Telecommunications International Ltd., which at the time owned Hutchison Essar. Last Friday’s ruling overturns a September 2010 Mumbai court ruling against Vodafone, and cannot be appealed.
The Indian Supreme Court directed the government to return Vodafone’s deposit of around $500 million plus 4% interest, increasing Vodafone’s already very solid liquidity. Vodafone will also benefit from the release of $2.0 billion in bank guarantees that it was obliged to provide in connection with the tax bill.

This positive ruling for Vodafone improves the perception of India as a fair market for foreign investors. An unfavourable ruling would have made it more difficult for foreign companies to invest in India.
India is the world’s second-largest wireless market after China, and is one of the biggest markets for Vodafone, which has nearly 146 million subscribers in the country and is the second-largest mobile operator there. Operations in India contribute around 8% of Vodafone’s total revenues, but less than 3% of group’s cash flows, owing to the large capital investments required to offer mobile services in the country. For the fiscal year ended last March, Vodafone’s India operation generated £3.7 billion in revenue, £962 million in EBITDA and £222 million in EBITDA minus capex. Because of the country’s growth potential and demographics, we expect India to become one of the group’s key assets.