Vodafone not liable for $4.4B India tax bill

[January 20, 2012]  MUMBAI, India (AP) -- British telecom giant Vodafone is not liable for up to $4.4 billion in back taxes and penalties, India's top court said Friday, in a ruling that removes significant uncertainty for foreign companies investing in the country.

The decision will come as a relief to international investors who feared the Vodafone precedent would expose them to unforeseen tax liabilities.

"We welcome the Supreme Court's decision, which underpins our confidence in India," Vodafone chief executive Vittorio Colao said in a statement. "We will continue to grow our Indian business -- including making significant investments in rural areas and in 3G network coverage -- for the benefit of Indian consumers."

Faced with flagging growth and investment and a weakening currency, the Indian government has been scrambling to rekindle foreign investment.

Analysts say the Vodafone tax case had cast a chill on investor sentiment, serving as a powerful emblem of the danger of shifting regulations in Asia's third largest economy.

At the same time, the Indian government is eager to boost revenues to help balance its budget and pay for planned increases in spending on social programs in a country where some 800 million live on less than $2 a day.

Analysts say at least eight other companies are facing similar litigation, as India steps up tax collection efforts to help plug its growing fiscal deficit.

"This will improve investor sentiment tremendously," said Mumbai lawyer Nishith Desai. "Rule of law is re-established."

He said the verdict will hasten dealmaking which had stalled as companies awaited clarity on tax law.

"We will see a lot of interest in India in terms of FDI (foreign direct investment) and outbound investment as well," said Desai, who has done work for Vodafone.

The dispute centered on Vodafone's $11 billion acquisition of the Indian telecom assets of Hong Kong's Hutchison Telecommunications in 2007.

In May 2007, Vodafone International Holdings BV -- a Dutch subsidiary of the British telecom giant -- acquired a 67 percent stake in CGP Investments Ltd., a Cayman Islands company which held the Indian telecom assets of Hutchison.

Vodafone says it doesn't owe tax on the deal because it took place between two foreign entities.

Friday's ruling overturns a high court decision which favored Indian tax authorities. Mumbai's high court had found that the deal was taxable in India because it involved the indirect transfer of Indian assets, which accrue revenue in India.

The government said Vodafone owed 112.2 billion rupees ($2.2 billion) in tax and interest, plus up to 100 percent in penalties.

Vodafone said the Supreme Court's decision absolved it of liability.

Vodafone said the court would also refund, with 4 percent interest, the 25 billion rupee ($496 million) deposit it made on the potential tax bill in November 2010.

GE, SAB Miller, Cadbury, AT&T, Sanofi, and Vedanta are among the companies fighting tax cases in India that could be affected by the Vodafone precedent, said Sandeep Ladda, executive director at PricewaterhouseCoopers in India.

"This settles a prolonged litigation which had created a lot of uncertainty for multinationals," he said. "This should provide much needed respite to other litigants in other cases."

But he cautioned that the legal precedent may have limited impact on new deals. India's new Direct Tax Code, likely to be implemented in 2013, currently contains provisions that would make transactions similar to the Vodafone deal liable to Indian tax, he said.

Desai said he hoped the new tax code would be changed to reflect Friday's judgment.

India is an increasingly important market for Vodafone. It was home to 145 million of Vodafone Group Plc's 391 million mobile customers worldwide as of September.

Vodafone lost 9 million pounds in India during the six months ending in September, but counted on the country for 9 percent of the group's 23.5 billion pound global revenues during the period.

[Associated Press; By ERIKA KINETZ]

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