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Vodafone Challenges US$2bn Indian Tax Bill

by Lorys Charalambous,, Cyprus

25 September 2007

Vodafone's new Indian unit, Vodafone Essar, has taken its fight with the Indian tax authorities over a US$2 billion capital gains tax bill to court.

Reports in the Indian media have revealed that Vodafone Essar has filed a writ in the Bombay High Court in protest against the Income Tax Department's decision to serve the capital gains tax demand on the company, which was the result of Vodafone's $11 billion acquisition of a majority stake in Hutchison Essar, India's fourth largest mobile telephony firm, from Hong Kong based Hutchison Telecommunications International Ltd (HTIL). The first hearing in the case is expected to be held on September 27.

Commenting on the issue, Arun Sarin, Vice-Chairman, Vodafone Essar, told reporters following a recent board meeting that: “We are working with the Income-Tax Department to sort this issue. Neither the Essar Group, nor Vodafone, nor Vodafone Essar is liable to pay taxes.

Vodafone Essar is arguing that, since it was the buyer, the capital gains tax liability should be assessed against HTIL. "It is the seller who should be taxed; and the seller is not one of the parties represented here," Sarin reportedly stated.

However, experts familiar with the case have suggested that the Indian Income Tax Department served the bill on Vodafone due to the complex company structure through which the deal between Vodafone and HTIL was carried out. It is believed that the purchase may have been arranged via an offshore subsidiary in Mauritius, with Vodafone-Essar acting as an 'agent' in the deal. This could give the Indian tax department cause to show that a transfer took place, and that capital gains tax at 22% should have been deducted at source by Vodafone.

According to a report in Indian daily newspaper, The Hindu, Vodafone owns 52% in Vodafone Essar, and the Essar Group owns 33%. The remaining 15% is held by the company's Managing Director Asim Ghosh and another shareholder, Analjit Singh.

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