The Supreme Court ruling that prevented India from taxing Vodafone's acquisition of an Indian company showed that transactions between foreign entities, even those intended to control Indian assets, fall outside India's legal system. While the tax authorities' intentions were valid, their actions against Vodafone lacked a clear legal basis, revealing weaknesses in India's unclear laws. To tax such transactions, India should have amended its tax code earlier to allow rules like China's and South Africa's General Anti-Avoidance Rule, which would give authorities power to deny transactions lacking commercial purpose beyond tax benefits. Proposed amendments were made in 2009 and a committee recommended implementing GAAR no earlier than 2016 with certain safeguards. The government must keep its

1. Vodafone Tax Issue and its Impact on Indian Legal System
The Supreme Court of India’s verdict preventing the Indian tax authorities from taxing
Vodafone International Holdings Ltd for its acquisition of CGP investments Holding Ltd
clearly shows that a transaction of foreign assets between to two foreign entities even with
the sole intention of controlling assets in India is beyond the purview of Indian legal system.
Even though the intention of the Indian tax authorities were right, but it was not with in the
Indian law. Indian goverments action of pursuing Vodafone BV without a clear legal mandate
shows the weakness in the Indian legal system and its lack of clarity and evolution. If India
wanted to tax these type of transactions, it should acted with a vision and amended the
Income Tax Act 1961 to allow for provisions known as the GAAR, like China and South
Africa.
General Anti- Avoidance Rule if implemented, will give the Indian Tax authorities the power
to deny the transactions or arrangements which do not have any commercial substance other
than achieving tax benefits. As of 2008, 14 countries have already implemented GAAR, of
which 10 are developed countries.
An Amendment to the Income Tax act was proposed in 2009 and a committee was set up in
2012 to address the concerns of the stakeholders in the process and the committee’s important
recommendation that were incorporated are to delay the implementation of GAAR till 2016,
form an separate Approval committee and it will be applicable only to investments made after
April 2010.
To improve the business environment, bring clarity to the legal system and to eliminate
uncertainty in the government process, the government should have a prospective legislative
process that will keep abreast with the changing global dynamics of doing business.