Vodafone Faces Huge Indian Tax Bill

by Lorys Charalambous, Tax-News.com, Cyprus

08 December 2008

Mobile phone giant Vodafone could be forced to pay a USD2bn bill for unpaid tax in India after the High Court in Mumbai ruled in favour of the tax authorities in a long-running dispute.

The British-based company is being chased over taxes relating to its USD11bn purchase of Indian operator Hutchison Essar from Hong Kong based Hutchison Telecommunications International Ltd (HTIL) in 2007, with the Indian tax authorities alleging that Vodafone has failed to pay a huge capital gains tax (CGT) bill incurred as a result of the acquisition.

Vodafone argues that, since it was the buyer, the capital gains tax liability should be assessed against HTIL. Vodafone has also pointed out that the sale took place between foreign entities and therefore it has no such tax liability in India.

The Vodafone/Essar deal was structured so that Vodafone International Holdings, a Dutch-registered subsidiary of Vodafone Group, made the USD11bn payment to a Cayman Islands-registered subsidiary of HTIL, in order to acquire the 67% stake in Hutchinson Essar.

Despite these claims, Vodafone's appeal has been dismissed by the High Court, which has given the company a further eight weeks to appeal the judgment. Despite the temporary reprieve granted to Vodafone, many observers fear that the zealous pursuit of the company for back taxes could deter other foreign investors from investing in India, particularly those seeking to acquire Indian companies.

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