Govt, Vodafone reported in talks to settle tax dispute

The government and Vodafone have reportedly begun behind-the-scenes talks for a mutually acceptable settlement of their festering dispute over taxes.

According to The Economic Times, a senior government official with direct knowledge of the matter confirmed the development. Also, Vodafone's recently unveiled initial public offering plans suggest there's been a move towards some sort of understanding.

Another indication of a rapprochement is that the government hasn't yet moved the Supreme Court against a Bombay High Court verdict in a separate transfer pricing case as planned.

"We are in discussions with Vodafone," said an official, without giving details.

The Indian government and the telecom company have been embroiled over the past few years in a tax dispute related to the latter's 2007 acquisition of Hutchison Essar through an overseas transaction. The row has been emblematic of investor concerns related to tax demands stemming from retrospective changes in the law.

Indian tax authorities served a fresh notice to the company demanding Rs14,200 crore in tax in February, just a few days ahead of the presentation of the budget in which the government promised a fresh attempt to settle cases arising out of the controversial 2012 amendment to income tax law (See: Income tax department threatens to seize Vodafone assets over tax dispute). Though the NDA government has not repealed the 2012 amendment it is attempting to create a mechanism to ensure disputes can be resolved.

The budget proposed a one-time settlement scheme for all retrospective cases, which involve scrapping penalties and interest on payment of the principal liability. This would mean that the Vodafone dispute can be settled at the principal liability of about Rs8,000 crore.

Vodafone has countered by saying that the deal is not taxable at all. However, according to people aware of developments, Vodafone is understood to have indicated a possible relaxation of its stand on the principal tax amount as well, says the report.

Publicly though, the company has remained lukewarm to the proposed scheme that is yet to become law as the finance bill hasn't been passed by Parliament. A Vodafone spokesperson declined to comment on questions from ET asking whether a discussion is on between the two parties to settle the case.

"In light of the retrospective law change in May 2012, Vodafone commenced international arbitration proceedings under the bilateral investment treaty in April 2014 as a way to achieve resolution," the person said. "Both parties have appointed arbitrators and we are awaiting the appointment of an independent chair for the tribunal." (Vodafone seeks arbitration as tax talks with government collapse)

The tax was levied on Vodafone for failing to deduct tax on its $11-billion payment to Hutchison Telecommunications International for the acquisition of Hutchison Essar in 2007.

 Vodafone moved court saying that the deal was done overseas and couldn't be taxed, eventually getting a favourable verdict from the Supreme Court (Vodafone wins tax case in Supreme Court). But the then government amended Section 9 of the Income-tax Act, 1961, retrospectively in the 2012-13 budget so that it took effect from the date of commencement of the Act, nullifying the Supreme Court decision.