Vodafone decision eases tax worries for Shell, others

IBM, Nokia Oyj, Microsoft cases could now be resolved

India's decision to drop a tax dispute with Vodafone Group Plc is likely to mean relief for Royal Dutch Shell PLC and others caught in similar, protracted battles, as the government tries to attract much-needed foreign investment.

India's image as an investment destination has been tarnished by a reputation for red tape, unpredictable rules and a tax office long seen as over zealous in its pursuit of foreign firms. Prime Minister Narendra Modi's government, seeking to reboot a slowing economy, has sought to change that.

Late on Wednesday, India's government said it would not appeal a regional court ruling in favour of Vodafone, the biggest foreign investor in India.

"It's a departure from the past when all the high-value tax cases were always litigated," said Himanshu Shekar Sinha, a partner at law firm Trilegal.

"With this, the government has sent a clear direction that appeals should not be filed routinely."

Tax lawyers said they expected cases such as those involving IBM, Nokia Oyj, Microsoft Corp and others could now be resolved instead through negotiation.

The Bombay high court ruled in favour of Shell in November, after it challenged the largest ever claim in an Indian tax case related to transfer pricing - the value at which companies trade products, services or assets between units across borders, a regular part of doing business for a multinational.

That case is expected to follow a similar pattern as for the Vodafone, according to a separate lawyer involved in the case.

"This government is serious about reducing litigation," Sinha said.

Vodafone has been involved in a string of tax disputes and in this latest iteration the tax office had accused it of under-pricing shares in a rights issue.

The Bombay high court in October ruled in favour of Vodafone, and the attorney general recommended the government refrain from appealing that ruling.

On Wednesday the government heeded the recommendation, just days after Finance Minister Arun Jaitley reassured investors that India would review its past, "adversarial", tax policy.

Jaitley has introduced advance tax ruling mechanisms for domestic investors and changed transfer pricing rules last year to prevent new tax disputes. The government estimates tax demand of more than $65 billion is mired in dispute and litigation.

"Systematically, slowly but surely, we are reversing the whole policy," Jaitley said to a gathering in Davos, Switzerland last week.

A spokesman for Shell declined to comment.