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Vodafone's Indian Tax Bill Hearing Starts

by Mary Swire,, Hong Kong

05 August 2011

India’s Supreme Court this week began hearing British mobile phone company Vodafone’s dispute over a huge tax bill slapped on it by the Indian tax authorities, a case which could have major ramifications for other large foreign investors in India.

Vodafone is challenging an order from a lower Indian court which upheld an INR110bn (USD2.4bn) capital gains tax bill in respect of the USD11.2bn acquisition of a 67% stake in Indian mobile phone company Hutchison Essar.

Vodafone is also appealing against the tax authority’s plans to add penalties and interest. This penalty could amount to a figure as high as the original sum charged.

The matter has arisen over the jurisdiction of the Indian tax authorities to demand capital gains tax, the main agreements having been signed in the Cayman Islands between non-Indian entities.

The Indian Tax Office has said that Vodafone is liable to be taxed because the majority of assets were based in India, and that under Indian law buyers have to withhold capital gains tax liabilities and then pay them to the government. Vodafone, however, contends that as it was the purchaser, not the seller, it made no taxable gain from the transaction.

In a statement issued by Vodafone previously it said that every adviser it had consulted, both during the transaction and since, were in unanimous agreement that no tax liability should arise. It said that India had not sought to tax such transactions before, and to do so would be contrary to international taxation principles.

Vodafone has already made a payment of INR25bn (USD562m) to the Supreme Court as a refundable deposit, and provided a bank guarantee worth INR85bn with an Indian state-run bank.

The Supreme Court case started on Wednesday, and lasted an hour. It is anticipated that a judgement will be reached by the end of the year.

TAGS: court | capital gains tax (CGT) | tax | business | India | law | mergers and acquisitions (M&A) | tax authority

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