Govt to test Vodafone nerve

New Delhi, May 9: The government has started what could be called a “psychological war” against Vodafone to get the British telecom giant pay its tax dues.

After the President signs the finance bill, revenue department officials will slap penal interest and fines on their original tax demand of Rs 7,900 crore, taking the total claim on Vodafone to more than Rs 20,000 crore.

The strategy seems to be two fold: if Vodafone does not create much of a fuss, the claim will be reduced to the original tax levy. However, if Vodafone contests the demand, the government will press on with its Rs 20,000-crore demand.

The previous tax notice to Vodafone was for Rs 11,500 crore, including interest.

The finance bill has a retrospective amendment — in the form of a clarification — that empowers the government to tax any deal involving assets in India even if the deal is struck outside the country.

The amendment was brought after the Supreme Court struck down an earlier Bombay High Court judgment upholding the tax demand on Vodafone.

Officials point out that tax on foreign deals involving Indian assets can only be avoided by using provisions of the double taxation avoidance agreements, which India has with 82 countries.

Unfortunately for Vodafone, India does not have such an agreement with the tax haven of Cayman Islands where the deal was done.

This is the main threat the government will hold out — do a deal and get away with just paying the original tax claim of Rs 7,900 crore; otherwise, face a larger claim by going in for a constitutional review or an international arbitration.

Notwithstanding any tough posturings, the government knows a quick deal will get cash into the state exchequer fast.

For Vodafone, a larger tax claim means it will have to provide for greater reserves in its books of accounts — in the event it loses the cases.

At the same time, the government could open investigations into possible FDI violations by Vodafone, lawyers said. It appears that the British company, while buying out Hutch and Essar separately, had breached the telecom sector’s FDI cap of 74 per cent for a short while.

Officials, however, said the Indian government was unlikely to ever take action as the breach was a technical one, and it would seem to be a deliberate attempt to victimise a firm with which it was having a legal fight. Still, the threat of a probe could be held out as a pressure tactic.

Vodafone today said, “We are naturally disappointed that, despite widespread concern, the government has not seen fit to propose amendments to address uncertainty caused by retrospective tax legislation.

“We are studying the legislation as amended, and will take all possible steps to safeguard our shareholders' interests.”

Vodafone also pointed out that “to underline our commitment for the long term, despite making considerable investments over the past five years, Vodafone has yet to take a single rupee out of the country.”

The Vodafone tax case had been the object of a lengthy lobbying by the British government.

Besides regular lobbying by the British High Commission in Delhi, visiting British ministers had picked up the cudgels for Vodafone.

India has countered by citing retrospective legislations by the British government to pursue what it considers legitimate tax claims.

Vodafone was caught in a tax dispute in Britain too. Two years ago, the mobile firm settled the dispute with the British revenue authority over alleged transfer of profits to a Luxembourg arm by agreeing to pay £1.25 billion.