Move aimed at allaying fears of foreign companies.
CHENNAI: The Indian cabinet has given the go-ahead signal for a conciliatory move to end a tax dispute with British telecom major Vodafone. The process will have the potential to allay the fears of foreign companies about buying a stake in Indian companies held by foreign firms.
Vodafone was slapped a notice of demand for over $2 billion by the income tax department in 2007 after the company acquired controlling stake from the Hong Kong-based Hutchison in India’s Hutchison Essar.
Since Hutchison has no presence in India currently, the income tax department issued a demand notice to Vodafone treating it as the Hutchison representative. The tax department also charged the British company of not withholding tax liability while making payment for the stake purchase.
Vodafone took the matter to the court of law and won the legal battle last year with the Supreme Court ruling in its favor. The court held the view that Vodafone need not pay any tax for the acquisition of a stake in Hutchison Essar.
However, the government introduced a fresh law to make a retroactive tax claims on the already closed deals, which drew sharp criticisms from business groups abroad. The law effectively undid the court ruling in favor of the company.
In response, Vodafone argued that it did not owe the Indian tax department any taxes. In fact, the company wanted to drag the matter to international arbitration but later it chose a conciliatory process to settle the issue once for all.
The government’s Attorney General G.E. Vahanvati had earlier opposed the out-of-court settlement with Vodafone. The current Law Minister Kapil Sibal revived the case after assuming the office following the resignation of Aswani Kumar, who was not in favor of a conciliatory move citing legal difficulties.
The attorney general has also changed his mind after the finance ministry clarified that the conciliation proposal does not necessarily mean bypassing or altering the tax liability as per the income tax act.
While the income tax department sought interest and penalty apart from the tax, the company is likely to raise these issues arguing that the latest retroactive tax cannot seek penalty and interest. Officials also reportedly agreed in principle that interest and penalty cannot be levied when there is a retrospective amendment. If the government offers this conciliation, then the department may come out with a clarification circulation.
Nonetheless, the current conciliation move is aimed at ending the tax dispute with a foreign company that is likely have wider repercussions among foreign companies who may be interested in buying other foreign firms’ stake in Indian businesses.
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