The Vodafone Essar Dispute: Inadequate Tax Principles Create Difficult Choices for India

Although the international taxation system is not new to problems and crises, economic liberalization and the increasing integration of world markets has intensified its difficulties, with MNEs being at the forefront of tax avoidance by taking advantage of loosely co-ordinated international tax treaties. The threat is worrisome enough for emerging economies such as India and China to take notice, despite their earlier stance of regarding foreign investment as a boom, regardless of tax contributions. This article takes a specific example in the case of the Vodafone Essar tax dispute regarding the payment of capital gains tax on the transfer of a controlling interest in an Indian entity from one foreign company to another, in order to illustrate the loopholes in Indian tax law, the choice that is present before Indian courts - a choice between abiding by the principles of international taxation or changing Indian tax policy altogether, and a view on the way international taxation agreements are to be read in light of the norms of international taxation.