A conventional practice in many parts of the world is to own foreign assets, particularly those that are not core, through a chain of subsidiaries, many of them registered in tax havens. This has two advantages. If they need to be sold off, companies need not go through the often complicated legal procedures of the countries in which the physical assets are actually based. Second, the deal does not attract capital gains tax from any quarter. The Indian Revenue department has, however, challenged this. The tax authorities have claimed US$2 billion in the US$11.1 billion Vodafone acquisition of Hutchison Essar. The world is watching, says Ajay Vohra of New Delhi-based law firm Vaish Associates in this interview with India Knowledge at Wharton during the Wharton India Economic Forum. Vaish spoke on several other issues.
Below is an edited transcript of the interview.
India Knowledge at Wharton: Ajay, thanks so much for joining us today.
Ajay Vohra: Thank you.
India Knowledge at Wharton: You’re the managing partner at Vaish Associates, which is a law firm. Tell us a little bit about what you do there.
Vohra: I head this firm, which is engaged in tax, corporate and IP law practice. We have offices in Delhi, Bombay, Bangalore and Gurgaon. We are a firm with 80 attorneys, some of them with the dual qualification of chartered accountancy and law, or company secretary and law. I myself am an accountant and a lawyer, but I’m specializing in practicing as a lawyer now.
India Knowledge at Wharton: What kinds of law do you practice?
Vohra: Personally I am a direct tax specialist, so I practice on the tax side. I’m responsible for tax advisory and also tax litigation. I handle complex corporate tax matters up to the Supreme Court. I litigate personally before the Supreme Court and the high court.
India Knowledge at Wharton: Tell us about the legal environment for businesses in India. What are some of the obstacles they face, and how do you help them through that?
Vohra: Businesses that are being set up in India are required to obtain a couple of permissions, a couple of registrations. We handhold foreign corporations in order to have them set up and incorporate a company; we get them the registrations necessary under the Income Tax Act. If permission is necessary for a foreign investment, we seek [it]. Or if RBI [Reserve Bank of India] approval is required, we help them obtain that. So, essentially, we handhold the company right until it is set up and running.
India Knowledge at Wharton: And you have both foreign and domestic clients, is that correct?
Vohra: Yes, we have a large client base — large multinational corporations, Indian domestic business houses. A good mix of both.
India Knowledge at Wharton: Right now as I understand it, foreign law firms are not allowed to set up in India.
Vohra: That’s correct.
India Knowledge at Wharton: Tell us about that — what are the pros and cons?
Vohra: India made a commitment to the WTO that they would open up the legal services market. But within India, opinions are divided. One set of lawyers feels that if foreign law firms are allowed to set up shop in India, with their deep pockets, they will be able to poach talent and poach business from the existing law firms. So that’s clearly a threat many people feel. And the other thing is they feel that with foreign law firms coming in, people will tend to go for retaining their services, and they will take away the cream of the work. The experience with the accounting firms is that the Big Four handle the top end of the work. So lawyers don’t want that to be repeated. And if India opens up, [lawyers want] equal reciprocity in other countries as well.
India Knowledge at Wharton: You spoke about the Big Four accounting firms setting up. What do you offer as a law firm that’s a little bit different from, say, the tax practice of a Big Four accounting firm?
Vohra: Basically, as I told you, I am both an accountant and a lawyer. I started practice as an accountant and was a partner with Deloitte but didn’t find that challenging enough. You know, litigation was my forte. The cutting edge that we have compared to the accounting firms who are engaged in tax practice is that we provide an end-to-end solution. We are in tax advising. We conceptualize the approach that the client must follow. And if it gets into litigation, we can navigate it. The Big Four will eventually have to hire lawyers at some stage of the litigation. And I think if you are in court and you have a feel for what the court really thinks, your advice is more practical.
India Knowledge at Wharton: You said if foreign law firms come in they might poach talent. What do you look for in talent at your law firm? Is it similar to a U.S. law firm where there is an incoming class from the top law schools, every year — almost step-wise hiring? Tell us about how that works in India with law firms.
Vohra: India also currently has very good law schools. We have a five-year integrated law course, extremely professionalized with a very good curriculum. And students from such law schools are extremely knowledgeable, polished and competent. So law firms look to hire these kinds of students from these national law universities. That is one level of hiring. The other is, you do get people who are willing to move from one law firm to another, or move from industry to professional practice. So that’s hiring at a relatively higher level.
India Knowledge at Wharton: Vodafone has made some headlines regarding the issue with Hutchison. Tell us a little bit about that case and your take on it.
Vohra: I think Vodafone is a case that is currently being watched across the world. And this is a test case for India as well. You see, if shares of a company based outside India change hands between two nonresidents, India does not have the jurisdiction to tax [capital gains]. That’s been the accepted position in India. In the Vodafone’s case, the agreement provided for the change of shares [ownership] at the BVI [British Virgin Islands] level. A $1 share of a BVI company changed hands for, I think, billions of dollars. [Editor’s note: There were several companies involved, based in the BVI, the Netherlands, Cayman Islands, Mauritius, etc.] Ultimately, out of that [they got] the entire chain of subsidiaries, including the India piece. That also changed hands. So Vodafone became the owner of the India subsidiary, which is running the Vodafone network in India.
Indian Revenue said that this agreement, which seems to be a simple agreement for transfer of shareholding of $1 at the BVI level, is eventually a transfer of the business in India and transfer of assets in India, which gives India the nexus to tax this transaction. Vodafone did not withhold any tax out of the payment made to Hutchison of the sale consideration in the belief that no part of it was taxable in India. So Indian Revenue has taken the easy way and slapped Vodafone with a tax demand saying, ‘You defaulted in your withholding obligation. We, therefore, need to recover this tax from you.’
This case has been highlighted in the foreign media as well, because if this goes in favor of Indian Revenue, it’ll become a test case for several such transactions which have taken place outside India resulting in transfer of ownership of the India piece as well. And currently this has reached the Supreme Court. The Supreme Court is going to hear it in July.
India Knowledge at Wharton: So it’s something to watch out for.
Vohra: Yes, I think the international media and the international tax community is very alarmed about the prospects of this case.
India Knowledge at Wharton: Obviously the law in India is very complex. There’s been a lot of media attention about how difficult it is to get anything through courts, etc. What got you interested in the law to begin with? Why did you choose it as a profession?
Vohra: I always dreamt and visualized myself as a lawyer standing in court and arguing. It took me some years to actually realize that that was my calling. And I then gave up my chartered accountancy degree to specialize and do law. I think every case that I fight is a challenge, and it gives you a great high when you are able to put forth innovative, interesting arguments, irrespective of the consequences, whether you win or you lose. But a good nod from the judges or a good word of appreciation from the client that you’ve done your best, I think, gives you a great sense of achievement.
India Knowledge at Wharton: Thank you so much for joining us.
Vohra: Thank you.
