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 India's finance ministry is preparing to seek the federal cabinet's
approval to withdraw conciliation proceedings after Vodafone wanted
a separate tax dispute to be made part of them, according to an
internal government note seen by Reuters.
Policy uncertainties in India have unsettled investors, with tax
claims on foreign companies being one of the major concerns. IBM <IBM.N>,
Royal Dutch Shell Plc <RDSa.L> and Nokia <NOK1V.HE> are among
foreign firms contesting local tax claims.
Vodafone, the world's second-largest mobile operator by subscribers,
entered India in 2007 by acquiring Hutchison Whampoa's <0013.HK>
mobile phone assets. It is contesting a tax bill of about 112
billion rupees ($1.8 billion) relating to the acquisition.
The Indian Supreme Court ruled in 2012 that Vodafone was not liable
to pay any tax over the transaction. But the government changed the
rules, allowing it to make retroactive tax claims on completed deals
and drawing criticism from business groups.
The Indian cabinet gave the go-ahead for conciliation talks with
Vodafone last June. While formal talks are yet to begin, Vodafone
and Indian government representatives had a series of meetings last
year.
Vodafone had insisted that the conciliation talks included a
transfer pricing dispute involving a unit offering call-center
services to group companies.
The government disagreed leading to its move to scrap the talks,
according to the note.
"The matter related to Vodafone will be taken to the cabinet, and
the cabinet will take a final decision," D.S. Malik, a finance
ministry spokesman, told Reuters on Tuesday, declining to comment on
the specifics of the ministry's plan.
Vodafone has not been informed as the plan has yet to receive
cabinet approval, sources with knowledge of the development said.
Vodafone declined to comment.
No date has been set for the cabinet discussion, a government
official said on Wednesday.
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The formal scrapping of talks would allow the Indian tax office to
renew its demand on Vodafone, first made in 2007 and quantified
three years later. The demand in 2010 totaled about 112 billion
rupees, including interest until then, and could increase further.
Discussions in the conciliation plan approved by the Indian cabinet
last year were to include the tax amount, the interest to be
charged, and if there should be any penalty levied.
NOT LIABLE TO PAY TAX
Vodafone, whose Indian mobile services business is the country's
second-biggest by users and revenue, has repeatedly said that it was
not liable to pay any tax over the Hutchison acquisition.
In 2012, Vodafone threatened India with international arbitration
proceedings under a bilateral investment agreement after the
government changed rules to retrospectively tax deals.
Vodafone will likely appeal to an Indian court and may reopen the
international arbitration option if the conciliation talks are
scrapped, experts said.
"If there is a notice on (tax) demand, I think they will challenge
the amendment in the court as unconstitutional," said Ajay Vohra,
managing partner at New Delhi-based Vaish Associates Advocates.
"It will drag on," Vohra said.
(Additional reporting by Kate Holton in
London; editing by Erica Billingham)
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