Cabinet approves conciliation in $2 bn Vodafone tax row

The union cabinet today approved a proposal to start conciliation process in the dispute involving $2 billion tax liability of Vodafone Group Plc, stemming from its 2007 acquisition of mobile phone assets of Hutchison Whampoa in India.

The income tax department had slapped a $2 billion tax demand on Vodafone over non-payment of tax on its 2007 acquisition of a majority stake in the Essar group-Hutch joint venture.

However, the British telecom company secured a Supreme Court ruling last year in its favour, which stated that the telecom service provider was not liable to pay any tax over the acquisition.

The Supreme Court ruled that the UK-based company need not pay taxes in a transaction that took place between two overseas firms in yet another country.

There was no provision in Indian law to tax such deals, the Supreme Court pointed out, which prompted the government to bring retrospective amendments in the Income tax Act.

The government had since moved to make retrospective changes in the rules, enabling it to recover tax dues from deals already concluded. This had invited criticism from businesses and industry associations, from within and outside the country.

While the government was not forthcoming on its plans to deal with the issue, Vodafone and the authorities have been in talks for months over the tax dispute. Finance minister P Chidambaram, however, said he was confident of finding a solution to the long-drawn issue.

Finance ministry officials, meanwhile, said the conciliation process would necessitate amendments to the laws as they need to be uniform for all companies in similar circumstances.

Amendments to the Arbitration and Conciliation Act are also likely as the existing law does not provide for conciliation talks between a company and the sovereign state.

The income tax department had sent a notice to Vodafone asking the company to pay Rs14,000 crore, including Rs6,000 crore by way of interest. The penalty could go up to 100 per cent as well.

There is a provision of imposing penalty of 100% of the tax demand, which will be Rs7,900 crore in this case.