Cabinet nod for tax on Vodafone India within a week

Written by fe Bureau | New Delhi | Updated: Feb 26 2014, 20:08pm hrs
Vodafone IndiaEnforcing demand tricky as Vodafone India not party to tax case. Reuters
The income tax department in India is waiting for the Union Cabinet to formally endorse the finance ministrys proposal to call off the conciliation talks with Vodafone Plc relating to the Rs 20,000-crore tax dispute over the companys acquisition of Hutchisons 67% stake in Hutch-Essar in 2007. The Cabinet has to take a call on whatever step is to be taken next, finance secretary Sumit Bose, said, when asked about the mode of recovering the disputed tax demand.

The development is likely to kick off another round of litigation between the two sides. Sources in the government told FE the tax department will initiate steps to recover the tax Rs 20,000 crore including the penalty and interest as soon as the Cabinet endorses the proposal, likely in a weeks time.

The department is preparing to inform Vodafone that the retrospective amendment to the Income Tax Act in 2012 has reinstated the Rs 20,000-crore tax demand arising out of its 2007 purchase of Hutch-Essar, now known as Vodafone India.

No fresh notice will be sent to Vodafone since the earlier notice is still valid. There is no need for a fresh notice. The notice is already there..., finance minister P. Chidambaram had told a news agency in the course of an interview last week, adding that it is for the tax department to decide whether or not to enforce the notice.

Although Vodafone served a supplementary notice to the government on January 15 citing the bilateral investment protection agreement (BIPA) of the India-Netherlands bilateral investment treaty, sources said any arbitration proceeding under the same would not come in the way of recovery of the tax amount.

The two can run in parallel, according to officials aware of the developments, though there could be another tiff between the company and the government.

Sources said Vodafone would need to challenge the tax notice in a court of law once the tax department moves for recovery. The company needs to challenge the tax notice now. The Supreme Courts January 2012 verdict in its favour is not relevant now since the government later brought in a retrospective amendment in the Income Tax Act, 1961, which allows it to tax such deals. If it does not challenge the notice, the tax officials can go ahead to attach its properties or freeze bank accounts, said an official, explaining the procedure.

According to field officers, refusal to pay the claimed tax demand including interest and penalty would compel the department to take legal proceedings against Vodafone as an assessee in default. Tax experts said the Income Tax Act allows the government to attach the assets of a defaulting assessee including bank accounts, as was done in the case of Nokia recently.

Vodafones stand is clear on the matter. It feels that it owes the government no tax and that its stand has been vindicated by the SC judgment. The conciliation talks did not go ahead because the government did not agree to encompass all the aspects (which include the transfer price case as well) in the talks though the company had all along insisted on the same and even the SC judgment had viewed it within the overall tax demand.

Vodafone has said that the government has, in addition to the main tax case, also sought in a transfer pricing claim to tax an alleged transfer of call options held by a company now called Vodafone India Services Pte when in fact no such transfer took place: The options were held both before and after the Hutchison Essar sale by the same company. The Supreme Court examined the Hutchison structure in great detail and concluded that there was no transfer or assignment of call options in the Hutchison Essar sale, the company has said. So in seeking to tax the full value of the Hutchison Essar sale and then to claim tax on an alleged transfer of options in the Hutchison Essar sale, the government is seeking to tax one event twice, it added.