India’s Income Tax Department will issue a ‘demand notice’ to Vodafone, indicating the government’s intentions to continue pursuing the mobile operator regarding the ongoing tax case, reports The Economic Times.
Quoting two senior officials, the report states that the notice will be re-validated and sent to Vodafone, following the passing of Finance Bill in Indian parliament which is expected to happen in early May. The officials added that a clause in the Finance Bill, dubbed as the validation clause, will be used to revive tax claims which were previously rejected by the Supreme Court earlier this year.
In January 2012, The Supreme Court of India has ruled in favour of Vodafone in its Rs 11,000 crore tax dispute case with the Government, rejecting Government’s demands for a payment of Rs 112.2 billion/ Rs 11,2200 crore (£1.6 billion) tax and interest for a transaction between foreign entities Hutchison Telecommunications International Limited (HTIL) & Vodafone International Holdings (VIH) in Caymen Islands. The Indian government believed that the underlying assets in the company were Indian. The Court had then stated that the Indian Tax Department had no jurisdiction to tax the transaction since it happened offshore and it has no other option except for filing a curative petition.
A fortnight ago, The Supreme Court of India had rejected the government’s review petition, which it had filed after the Supreme Court judgement. It was also revealed that the government had refunded Vodafone’s deposit of Rs 2500 crore plus 4% interest to Vodafone, which was later confirmed by a company spokesperson.
In a possible bid to work around the Supreme court judgement and earn back the tax revenues which it believed had lost in this case, India’s finance minister Pranab Mukherjee had proposed a change in the Income Tax law and clarified the definitions of ‘property’ and ‘transfer’ in the Finance Bill chapter during the Union Budget 2012. Whats interesting though, was that the definition had been inserted in retrospect, with effect from, 1st April 1962, which would’ve retroactively taxed business deals, thereby impacting previous M&A deals carried out outside the Indian territory. It was expected that the Government would use these amendments to tax Vodafone if it was passed as part of the Budget. Further, it could also affect other deals including the Idea cellular and AT&T deal; the $500 million GE and Genpact deal; and $981 million Mitsui and Vedanta deal.
Following the announcement of these amendments, Vodafone CEO had written to the Indian Prime Minster and said that these amendments are ”arbitrary and punitive”. British finance minister George Osborne had also warned that the new amendments could hurt the foreign investment in the country. Reports also suggested that Vodafone had withdrawn an application by its Mauritius-based subsidiary Prime Metals to buy 5.5% of the issued equity share capital of Vodafone India Limited from Essar (ETHL Communications Holdings Limited), to avoid further problems since Prime Metals’s share acquisition would’ve exceeded the FDI limit of 74%. Piramal Healthcare had later bought these 5.5% shares of Vodafone India Limited from Essar (ETHL Communications Holdings Limited) for approximately Rs 3007 crore, increasing its stake to 11%.