It is a thin line that divides tax planning from evasion and the weight of the Supreme Court judgment in the Vodafone case is that the latter's deal with Hutchison Whampoa falls on the right side of that line.
The most significant aspect of the verdict that sees Vodafone victorious is not that the government will lose Rs.11,200 crore in tax revenue. It is also not that the government will have to refund Rs.2,500 crore to Vodafone with 4 per cent interest.
What is significant is that the judgment now confers acceptability and even respect to genuine deals between offshore entities where the underlying asset is in India. Hitherto, such structuring of deals was viewed largely as an attempt to evade tax. Post-Vodafone case, such transactions will be seen as genuine tax planning rather than evasion. The judgment also is clear that the taxman has no jurisdiction over deals executed abroad. This is likely to benefit other similarly structured deals such as between SABMiller and Foster, Sanofi Aventis and Shanta Biotech and Cairn and Vedanta.
The judgment could give a leg up to cross-border mergers and acquisitions as it clears the air on taxability issues. But the joy is likely to be short-lived as the government could plug the hole in the new Direct Taxes Code to ensure that such deals in future yield revenues.
An extremely positive signal that the judgement sends out is that our legal system is independent and fair and is not swayed even where the government is a contesting party. Of course, some of the sheen could come off if the Income-tax Department decides to file a review petition in the Supreme Court on the judgment.