Vodafone, Nokia tax disputes: Prasad sees ‘sinister’ design

With the income tax authorities recently threatening to seize the assets of Vodafone Group Plc if their demand for Rs14,200 crore in retrospective taxes is not met, Telecom Minister Ravi Shankar Prasad says he sees a ''sinister'' scheme to sully India's image as a ''prized'' investment destination by the media raising the Vodafone and Nokia issues from time to time.

"This is a sinister scheme against us. The pending tax dispute with Vodafone cannot and should not become the benchmark for India's image as a prized investment destination," Prasad told The Economic Times. "India is a great business case, and for Vodafone too. So many ratings agencies are describing India as a country of hope and opportunities."

He said India's conducive investment environment has attracted the likes of Foxconn, the world's largest contract manufacturer, and US chipmaker Qualcomm to invest in the country.

Prasad's comments come after the government faced a lot of flak when it was revealed last week that the income-tax department had served a reminder notice, asking Vodafone to pay up Rs14,200 crore in taxes and penalties or risk seizure of assets.

The notice was related to a dispute that the telco has been fighting for years over acquiring a 67 per cent stake in the mobile phone business owned by Hutchison Whampoa, now part of CK Hutchison Holdings, for $11 billion in 2007. Vodafone has said it doesn't owe the government any tax because the transaction was conducted offshore. Indian tax authorities argue that the deal is taxable because it involved assets in the country.

The latest tax notice was served even as the dispute is in international arbitration, with both parties having appointed their arbitrators who now need to appoint a third one. (See: India threatens to seize Vodafone assets over tax dispute).

Vodafone voiced its exasperation by describing the tax missive as a reflection of "a complete disconnect between the Indian government and the tax department". The government though downplayed the notice, saying it was a routine affair for all companies, which have pending dues.

Prasad pointed out that India has made every effort to portray itself as investor-friendly, not levying any taxes retrospectively, boosting startups through various incentives and protecting the patent regime.

"In the past, many decisions have been taken by the government in favour of the company (Vodafone). The government chose not to appeal a decision on a tax matter in Bombay High Court [which went in favour of the telco]," Prasad said.

The Hutchison sale dispute is the biggest of three tax cases involving Vodafone in India. One was related to the valuation of international transactions, which Vodafone won in the Bombay High Court.

In a separate ruling in October, the court said Vodafone didn't owe Rs8,500 crore in back taxes. In both cases, the government has decided not to challenge the decisions.

On Nokia, Prasad said that while the government was trying to find a solution, it couldn't just write off over Rs2,000 crore in taxes.

"For Nokia, we will find a solution by working with purchasers, or otherwise through the legal route of adjudication. But we cannot write off over Rs2,000 crore of tax," Prasad said.

Nokia's manufacturing facility in Chennai - once the beacon of India's domestic manufacturing - has been shut down after it was frozen due to a dispute with local tax authorities. The dispute meant the plant was left out from a deal which saw Microsoft acquiring the Finnish company. Nokia is unable to attract buyers due to the asset freeze. The matter is currently in court.

"Tax adjudication process is a part of the legal process in most countries. Even our companies face tax issues in Europe and America, but we don't make big issues out of those," Prasad said.