The Telegraph
Wednesday , January 9 , 2013
Since 1st March, 1999
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Govt nears Vodafone truce deal

New Delhi, Jan. 8: The government is close to hammering out a deal with Vodafone Plc on the telephony giant’s tax dues arising from its $11.2 billion buyout of Hutchison Essar’s operations in April 2007.

Once that deal is struck, the Centre is expected to announce plans to roll back the hugely controversial 50-year retrospective amendment to the income tax act announced in last year’s budget.

The retrospective tax had outraged foreign investors as it was seen as a perverse attempt to stymie a Supreme Court verdict that had gone in Vodafone’s favour just weeks before the budget.

Vodafone has always argued that it wasn’t liable to pay the tax as it was the buyer and not the recipient of the proceeds from the deal. The government insisted that Vodafone should have withheld a certain sum from the payout and handed it over to the government.

The deal between Hutchison Whampoa of Hong Kong and Vodafone Plc was struck between overseas subsidiaries based in tax havens such as Bermuda and the British Virgin Islands, which is typical of cross-border acquisitions. The government, however, said the transaction was a sham and intended to deny the government its pound of flesh from the deal. It argued that the only real asset transferred was the telecom operations based in India. The rest was just a paper trail created because of a complex web of multi-layered, cross-border holdings.

Vodafone and the income tax department are believed to be in discussions and close to a settlement.

Once this is through, the government plans to repeal the offending amendment to the income tax act that had alarmed and scared off foreign investors.

This is in line with the recommendations of the Parthasarathi Shome committee which said the government ought not to resort to retrospective taxation. However, officials pointed out the tax demand can stay despite the repeal of the controversial amendment under the normal income tax act.

Earlier this month, the income tax authorities served a fresh notice on Vodafone to pay up Rs 14,000 crore in unpaid taxes relating to that deal.

The government is also challenging the Supreme Court judgment which struck down its tax claims on Vodafone in January, leading to the retrospective amendment.

While challenging a Gujarat High Court judgment based on the January order, solicitor general R.F. Nariman demanded that a larger Supreme Court bench ought to take into account the government’s 100-page review petition listing 130 grounds on which its appeal should be considered. He claimed the apex court had not considered these grounds earlier.

However, sources say a deal between Vodafone and the government could be struck with the UK-based telecom giant paying the original tax demand of Rs 7,900 crore or perhaps even less. The government for its part would withdraw all cases against Vodafone and not hold it guilty of tax evasion.

The attempt at a reconciliation comes after a five-year slugfest in courts that produced an adverse verdict for the revenue department. The case arose over the revenue department's move to gouge out $2 billion in taxes from a $11.2 billion deal between Vodafone International Holdings, a Dutch subsidiary of Vodafone Plc, and Hutchison Whampoa and its associate firms.

Vodafone top executives have since met finance minister P. Chidambaram as well as new revenue secretary Sumit Bose in this connection.

Sources say the decision to go after Vodafone even as the retrospective tax amendment is repealed was taken after revenue officials made a strong case that letting Vodafone off the hook would affect a number of other cases. These include the Idea Cellular-AT&T deal, SAB Miller’s buyout of a 100 per cent stake in Foster’s India and General Electric’s sale of its majority stake in Genpact in a $500 million deal.

They argued the total notional loss to the exchequer could run into a massive sum that could invite adverse comment from the Comptroller and Auditor General which has stirred controversy with some of its recent reports.

The government needs to mop up Rs 10.75 lakh crore in direct and indirect taxes to trim its fiscal deficit. With the economy going through a slowdown, it isn’t certain that it will be able to meet its ambitious tax collection targets that were set out in last year’s budget.