British telecom giant Vodafone Group has said the international arbitration to resolve its Rs 14,200-crore tax dispute with the Indian government over its purchase of Hutch Essar eight years ago is likely to get delayed after the recent resignation of the state-nominated arbitrator former Chief Justice RC Lahoti.
Once India nominates a new arbitrator, both the parties have to decide on a neutral chairman for the arbitration tribunal as the previous nominee — Abdulqawi Ahmed Yusuf of the International Court of Justice — has declined to accept the offer. Vodafone nominee Yves Fortier of Canada continues to be on the panel.
“There is now likely to be a delay in appointing the chairman pending the Indian government appointing a replacement for its party-appointed arbitrator,” said Vodafone in its 2015 annual report.
The principal tax demand in the case was Rs 7,900 crore, but the total outstanding revenue claims in the case, including interest and penalty, has more than doubled.
Vodafone also said that its Indian arms were involved in a number of tax disputes with a total tax demand of 1.5 billion pounds (about Rs 14,440 crore) plus interest and penalty three times the principal demand.
The Supreme Court had in January 2012 struck down the tax demand over the Hutch Essar acquisition as not payable, but the previous UPA regime amended the Income Tax Act that year to clarify that transfer of shares of companies incorporated outside India, which derive their value substantially from assets situated in India, was taxable here. The clarification, which came into effect retrospectively, drew sharp criticism from investors.
Vodafone said its Dutch subsidiary, Vodafone International Holdings BV (VIH), which acquired Hutch Essar eight years ago for $11 billion, was reminded in 2013 of the tax demand and had updated the total outstanding to Rs 14,200 crore.
“We did not carry a provision for this litigation or in respect of the retrospective legislation at 31 March 2015, or at previous reporting dates,” said the company.
The other tax disputes that Vodafone India faces are over issues such as applicability of value-added tax to SIM cards and dis-allowance of income tax holidays. The company is of the view that any finding of material liability to tax is not probable.
The telecom giant believes “regulatory challenges” in India are hampering its economic development, but the country offers a good long-term investment opportunity for global firms.
“Spectrum auction structures combined with the piecemeal release of new spectrum leaves less capital available for investment in bringing high quality services to more of the country, and this is exacerbated by other ongoing regulatory challenges,” Vodafone Group chairman Gerard Kleisterlee is quoted as saying in the report.