Vodafone likely to take $2 billion tax hit after ITAT order

The Mumbai Income Tax Appellate Tribunal (ITAT) has upheld the Income Tax department's stand that telecom major Vodafone has to pay capital gains tax in India on the $11-billion deal by which it bought Hong Kong-based Hutchison Telecom International's (HTIL) stake in Hutch-Essar Ltd, now Vodafone Essar.

However, the order issued to Vodafone on Monday evening did not quantify the tax payable by the telecom major, which is yet to be calculated. Reports say the tax payable could be over $2 billion, going by the revenue authorities' earlier tax demands.

The department was addressing the issue of whether the Indian tax regime has jurisdiction to claim tax on a transaction that took place outside India between two overseas parties.

The transaction was structured in a way that Hong Kong-based Hutchison International sold its stake in Hutch Essar to British company Vodafone through the medium of a Mauritius-based company.

On Monday the Indian tax regime reaffirmed its right to tax such a transaction. The order was based on the premise that the ownership of Indian company Hutch-Essar changed hands because of a transaction that took place outside India. As a result the Indian authorities have every right to claim capital gains tax from the profit made from the investment in India.

''Vodafone remains fully confident that no tax is payable by Hutchison on this transaction and that Vodafone has no liability in any event,'' said Vodafone in an e-mailed statement. The Supreme Court has granted Vodafone the right of appeal to the Bombay High Court if it disagreed with the determination of the tax authorities, Vodafone added.