In the next three months India will hold a general election. It will be a defining moment for the country at a time of growing economic challenges. The frontrunner in the race to be prime minister is Narendra Modi, the controversial leader of India’s Hindu nationalist opposition. Much of the international discussion about Mr Modi currently focuses on his reputation as a Hindu nationalist and his alleged complicity in past anti-Muslim violence. But if he wins power, the world’s business leaders will be asking another question about him: can he reverse India’s notoriously aggressive tax treatment of foreign companies?
There have been numerous disputes between the Indian taxman and foreign concerns in recent years. None has attracted more attention than the row involving British mobile operator Vodafone. Back in 2007 Vodafone took over an Indian mobile outfit that was majority owned by Hutchison Whampoa, a Hong Kong conglomerate, paying $10.9bn. The Indian government subsequently demanded that Vodafone should hand over $2.6bn in capital gains tax for the acquisition, a demand the company refused.
In the ensuing five years Vodafone and the government battled this out in the courts. The Vodafone deal involved a Dutch subsidiary of the British company buying a Cayman entity owned by Hutchison. The Indian government claimed that Vodafone was liable for $2.6bn because it should have withheld the tax from Hutchison on its behalf at the time of the deal. Vodafone argued that, under Indian law, the transfer was not taxable because it took place in a foreign jurisdiction.