Vodafone's Indian Tax Dispute Reignites

by Mary Swire, Tax-News.com, Hong Kong

17 August 2012

The dispute between Vodafone and Indian tax authorities has been reignited by the Attorney General, who has said that the payment of tax can be demanded in connection with the telecom giant's purchase of Hutchinson Essar.

In January, the government lost its five-year battle with Vodafone in the Supreme Court, when it was ruled that the company was not liable for a USD2.2bn bill in back taxes and penalties in connection with its acquisition of a majority stake in mobile phone company Hutchinson Essar in 2007. The government was also ordered to repay the USD496m deposit paid by Vodafone in late 2010, plus 4% interest.

In spite of its victory, concerns were raised by Vodafone in April that the government's Finance Bill could overturn the Court's verdict. The transaction had originally been targeted by Indian tax authorities because a Dutch-registered subsidiary of Vodafone Group had made its payment to a Cayman Islands-registered subsidiary of HTIL, in order to acquire the 67% stake in Hutchinson Essar.

The Finance Bill was therefore shaped so as to bring such transactions into the Indian tax net. It clarifies that “an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India if the share or interest derives, directly or indirectly, its value substantially from the assets located in India”.

Last week, the new Finance Minister Shri P. Chidambaram announced that he has directed a review of retrospective tax provisions, with the hope that "fair and reasonable solutions" can be found to pending, and likely, disputes. However, Attorney General Goolam E. Vahanvati's comments indicate that the issue remains controversial, in spite of Chidambaram's efforts to allay investors' fears and boost confidence.

Vahanvati is reported to have advised the Finance Ministry that it may still be able to recover the taxes from Vodafone. The government's claims would be based on the controversial retrospective amendments made to the Income Tax Act.