Vodafone seeks arbitration as tax talks with government collapse

Vodafone Group Plc has served a fresh international investment arbitration notice to India over the long-running tax dispute now said to be worth around Rs20,000 crore - a development that has prompted the Indian government to seek withdrawal of its conciliation offer.

The finance ministry has reportedly already obtained the opinion of the law ministry and has drafted a cabinet note for withdrawing the non-binding conciliation offer it had made to Vodafone in June last year.

In its notice on 7 April, Vodafone said it will go ahead with international arbitration, preferably in London, and has given the government two months' time for a response, which may mean the new government will have to take a call on the issue.

The tax department and Vodafone have been locked in a dispute since 2007 over the telecom company's $11-billion acquisition of Hutchison Essar Ltd, now known as Vodafone India Ltd, in an overseas deal. The tax demand, which was initially around Rs8,000 crore, has now more than doubled to Rs20,000 crore after adding interest and penalty.

''Since Vodafone and the Indian government have been unable to find an amicable means of resolving the dispute, Vodafone has commenced international investment arbitration as a way to achieve resolution,'' the company said in a statement.

The conciliation process, initiated by the Indian government last year under domestic laws, will now be discontinued.

Vodafone International Holdings BV has filed for arbitration under the bilateral investment protection agreement between India and the Netherlands, questioning the government's enactment of the retrospective tax laws in 2012 that made the telecom company liable to pay tax even after a favourable judgement by the Supreme Court.

In 2007, Vodafone International Holdings, a Dutch unit of the British telecom firm, bought the Indian business operations of Hutchison Telecommunications International Ltd through the purchase of a Cayman Islands-based firm called CGP Investments Ltd, a unit of Hutchison.

The Indian tax department has estimated that Vodafone should have withheld part of the amount as tax while paying Hutchison. Vodafone and the tax authorities went to court to resolve the issue.

The Supreme Court, in its judgement in January 2012, said the deal was not taxable in India. Subsequently, the government introduced retrospective amendments to laws to bring such indirect transfer of shares under the tax net. It also introduced a validation clause that made Vodafone liable to pay tax in India despite the apex court's judgment.

Vodafone then proceeded with initiating arbitration under the bilateral investment protection agreement signed by the Netherlands and India. It argued the retrospective amendment amounted to a denial of justice and a breach of the Indian government's obligations to accord fair and equitable treatment to investors.