No Vodafone accord till tax law allows settlement mechanism

Written by Sunil Jain | New Delhi | Updated: Feb 6 2013, 07:30am hrs
Vodafone officials have met revenue secretary Sumit Bose several times over the past few weeks to settle the R11,200-crore tax dispute on the companys $11-billion purchase of Hutchisons shares in 2007, but no settlement can be reached until the government changes the law to allow for this, sources close to the negotiations told FE. The Budget is expected to make announcements in this context, paving the way for settling several other similar tax disputes, especially in the case of transfer pricing allegations.

Interestingly, the number of tax disputes has shot up dramatically. According to finance ministry data, there was an 85% increase in transfer pricing allegations in 2011-12. While a total of R1,220 crore was the amount of such demands in 2005-06 (for cases pertaining to 2002-03), this rose to R24,111 crore in 2010-11 (for cases pertaining to 2007-08) and then to R44,532 crore in 2011-12 (for cases pertaining to 2008-09). In 2011-12, every other transaction of MNC subsidiaries led to a tax claim, up from one in four just 5 years ago.

Since Vodafone is not an existing assessee that has under-reported taxes, it cannot ask for a settlement under existing processes. But there is no other official mechanism now that allows the taxman and Vodafone to reach a settlement on the amount of tax that needs to be paid, or onwhether interest and penalties are to be waived and, if so, by how much. According to Ajay Bahl, founding partner of top corporate law firm AZB & Partners, The absence of a formal mechanism to settle tax disputes, other than that under various tax treaties with different countries, is preventing several firms from settling with the government This is a serious lacuna that needs to be addressed.

Besides the Vodafone-Hutch tax dispute, other big cases that cannot go forward in the absence of a formal dispute resolution process include Nokia where, sources say, a R13,000-crore tax demand is in the process of being served for alleged transfer pricing violations; a R3,500-crore dispute with Vodafone over the demerger of its passive infrastructure assets to Indus Towers; and a R8,500-crore transfer pricing adjustment of R8,500 crore also involving Vodafone where the tax demand could be about R2,600 crore.

The high-profile transfer pricing adjustment over the purchase of Shell Indias shares by parent Shell that hit the headlines on Monday with Shell India chairperson saying Shell plans to challenge the order strongly also falls in the same category. Shell officials will be meeting the DG International Taxation to discuss the matter on Friday.

Sources say the Vodafone-government discussions are centred around the format in which the negotiations are to take place this will include putting in place a legal structure for a formal settlement. Since Vodafone believes it is on strong legal footing, sources say the telco is looking to get some relief on its other pending tax disputes if it is to pay any part of the Rs 11,200 crore tax liability. Sources say it is unlikely the negotiations can be finished before March 31, which will allow the government to take credit for the amount in the Budget.

While the finance ministry is not taking any precipitate action till a solution is found, Vodafone has agreed to not file for arbitration till the negotiation process is declared a failure.