Vodafone moves HC over tax liability row with I-T

Vodafone said on Monday it has filed an appeal in the Bombay High Court against the income tax (I-T) department in the ongoing tax liability dispute. The dispute revolves around the telco?s tax liability in the $11.2-billion deal whereby it acquired Hong-Kong-based Hutchison Telecom International?s (HTIL) 67% stake in Hutch-Essar (now Vodafone Essar) in 2007.

This is the second round of litigation involving Vodafone and the I-T department. The case, which has its origins in 2007, had reached up to the Supreme Court, which, in January 2009, referred it back to the I-T department.

On May 31, the I-T department held in a ruling that it had the jurisdiction to tax the transaction. The tax liability of Vodafone is estimated to be around $2 billion. Consequently, Vodafone International Holdings BV (VIHBV) filed an appeal on Monday with the Bombay High Court against the order on jurisdiction issued by the tax authority on May 31, 2010.

The firm, in a media statement, said, ?Vodafone remains fully confident that no tax is payable and the legal advice we have received unanimously agrees.?

The Mumbai-based Ruias, who run the Essar group, have a minority stake in Vodafone Essar. The I-T department felt that the Cayman Islands transaction was essentially a transfer of an Indian asset and said that Vodafone should have deducted tax at source when it paid Hutchison.

In 2007, Vodafone received a show-cause notice asking it why it had not done this, which the firm challenged before the high court. After the high court dismissed Vodafone?s petition, it took the matter to the apex court in January 2009. The Supreme Court sent the case back to the I-T department to decide first whether the latter had the jurisdiction, because both Vodafone and Hutchison are based in foreign countries.

Vishal Malhotra, tax partner at Ernst & Young, said, ?The interpretation by Vodafone is compliant with the current laws. However, with the direct tax code coming into implementation by next year, such transactions could potentially come under the tax net.?

As per the direct tax code, for any direct/indirect transfer of assets, a firm needs to pay about 20% on the gain. However, more clarity is sought on the indirect transfer of assets.

Ironically, this would lead to an increase in private equity and merger & acquisition transactions happening from the Mauritius and Singapore. This is because under the India-Mauritius treaty, gain on sale of shares of an Indian company are not taxable in India and only negligibly taxed in Mauritius.

The Vodafone tax case is already said to have created apprehension among the global business community about the unpredictability of the Indian tax regime, which, in turn, could impact their decision to invest in India. Foreign direct investment in the telecommunications industry has not received a very good response, irrespective of the 74% limit raised by the government five years back.