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HindustanTimes Fri,19 Dec 2014

Talks break down, govt may again slap Rs. 20,000cr penalty on Vodafone

Gaurav Choudhury, Hindustan Times  New Delhi, February 11, 2014
First Published: 18:36 IST(11/2/2014) | Last Updated: 02:10 IST(12/2/2014)

In a move that could further fray investors’ nerves, the government is planning to move ahead with its Rs. 20,000-crore tax demand on Vodafone after conciliation talks with the British telecom giant broke down on a dispute involving its acquisition of Hutchison’s mobile assets in India in 2007.

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“Vodafone has not agreed to the terms of conciliation,” a government source told HT.

The finance ministry has floated a draft cabinet note to call off the conciliation talks and allow the tax department to collect the outstanding amount of about `20,000 crore, including interest and penalties from the company. The law ministry has agreed to the finance ministry’s proposal, sources said, adding that a final cabinet decision is expected shortly.

Speaking on the sidelines of a Central Vigilance Commission event, Sudha Sharma, chairperson of the Central Board of Direct Taxes, said, “Conciliation is a policy issue; as income tax department, we will go ahead with whatever has to be done.”

The company said it would not comment. “I’m afraid we’re not providing comment. Apologies we can’t be more help on this occasion,” Morgan Matt, senior media relations manager, Vodafone, told HT in an emailed response.

The cabinet had agreed last June to accept Vodafone’s offer of conciliation and keep the tax demand in abeyance, in what was seen as a sign that the government was keen on resolving rows marring India’s image as an investment destination.

The talks broke down after the government refused to agree to Vodafone’s demand that a separate dispute involving its Pune-based BPO arm Vodafone India Services also be included in these negotiations. The tax payout could affect Vodafone’s plans to increase its stake in the Indian arm to 100% in India. It may also be forced to rejig its financial plans in the wake of spectrum auction payment and tax liabilities.

In January 2012, Vodafone won a major battle in the dispute after the Supreme Court ruled that it wasn’t liable to pay any taxes under prevailing laws. The finance ministry then, in the budget for 2012-13, proposed changes in India’s 50-year-old tax laws to impose a retrospective provision for tax on some types of international mergers that may include Vodafone’s 2007 acquisition of Hutchinson’s mobile assets in India for $11.1 billion (about Rs. 68,000 crore currently).

Vodafone contested it on the basis that no tax was due in any event as the deal was concluded in Cayman Islands. While the basic tax demand for the 2007 acquisition is `7,990 crore, the outstanding dues, including penalty of a similar amount and accrued interest, run into Rs. 20,000 crore.

The I-T department had kept its tax notice to Vodafone in abeyance following the cabinet decision to go in for conciliation talks.

“The I-T department may proceed as per the provisions of the income tax act to collect the outstanding demand from the company,” the law ministry said in its comment on the new cabinet note.

Legal experts said the telecom company can challenge this in court. “Vodafone has an option to challenge the law in court on the grounds that it was done with malafide intention to defeat the SC judgment in their favour. Whatever discussions were initiated with the government must have been without prejudice to their right to take legal recourse,” said Sumant Batra, managing partner, Kesar Dass B & Associates.

Read: Govt-Vodafone talks breakdown may hit other corporate deals, say experts

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