Telecom major Vodafone could soon face a tax liability for about Rs 10,000 crore by way of capital gains tax with the Indian tax authorities gearing up to give a final order in this regard anytime this month. The order regarding capital gains tax to be levied on the $11.2 billion transaction between two foreign firms?Dutch firm Vodafone and Cayman Island-based Hutchison?would also provide more clarity to policy framework for determining the tax liability of foreign companies acquiring a stake in Indian firms.
Vodafone, which was issued show-cause notices by the tax department, has submitted a voluminous response to it and the company officials are also appearing before the tax department in Mumbai for personal hearings.
?The tax order on the jurisdiction of Indian tax authorities on the deal would come anytime in April. The hearings are going on. The tax implication is huge in the case,? a senior finance ministry official told FE.
The tax department is hopeful of getting the blocked Rs 10,000 crore as Bombay High Court in the case also upheld the jurisdiction of the Indian tax authorities to look into the case, the official said.
In response to a questionnaire from FE, Vodafone, however, declined to comment. The company has been maintaining that the Indian tax laws do not apply in the case since Vodafone is a Dutch company (registered in the Netherlands) and Hutchison is incorporated in the Cayman Islands. Vodafone lawyer had also said that a share purchase did not amount to transfer of capital assets, which could be taxed.
The tax department that thought otherwise, had issued two show-cause notices? the first in September 2007 and the second in Oct 2009?to Vodafone under section 201 of the I-T Act, asking why tax, estimated at $2 billion, was not deducted in the payment it made to Hutch. The deal was approved by the FIPB in April 2007.
In fact, the tax department has already conducted an exercise to identify such transactions, including some private equity deals, but will act on them only after a final verdict in the Hutch-Vodafone case. The tax order will have a bearing on at least half-a-dozen similar offshore deals in which one or both the companies concerned are not resident in India. As regards the Vodafone case, the company had acquired the majority stake held by Hutch Telecommunications International Ltd (HTIL) in Indian mobile operator Hutchison-Essar (now Vodafone Essar) for around $ 11.2 billion. The government, following this decided to treat Vodafone as an agent of Hutch, a non-resident, under section 163 of the Act to recover tax dues.