MY BIZ: Government hangs up on Vodafone in tax trouble

In a major setback to telecom giant Vodafone, the finance ministry has decided to withdraw the conciliation proceedings with the company on the income tax demand raised against it.

According to official documents, while the Union Cabinet had approved the conciliation proceedings over the initial capital gains tax case, Vodafone International Holdings BV (VIHBV) went on to raise the additional demand that the second case relating to transfer pricing against it also be included in the conciliation proceedings.

Setback: Martin Pieters, MD and CEO of Vodafone India

Setback: Martin Pieters, MD and CEO of Vodafone India

However, since Vodafone's insistence on including the transfer pricing case in the conciliation proceedings was not covered by the Cabinet decision, the finance ministry decided not to go ahead in the matter.

Official papers show that the law ministry has also agreed with the finance ministry's latest view on not proceeding with the conciliation process as Vodafone's view is not in consonance with the Cabinet decision.

The approval for withdrawal of the conciliation proceedings will now be set to the Cabinet again for approval after which "the Income Tax authorities will proceed as per provisions of the Income Tax Act to collect the outstanding demand from".

The I-T Department had raised a Rs 8,000-crore demand on the Vodafone Group as capital gains tax for its 2007 acquisition of Hutchison Essar.

In addition to this penalty, interest was also expected to be levied taking the total figure to around Rs 13,700 crore.

Senior officials were of the view that in the conciliation proceedings, the penalty and interest could possibly have been waived so that the company would pay only the tax amount.

However, Vodafone appears to have shut this window by raising the demand for its transfer pricing case also to be included in the conciliation proceedings.

The second case relates to Vodafone's issue of shares of its Pune-based business process outsourcing arm Vodafone India Services to Vodafone Teleservices Mauritius in 2007-08, which according to the I-T Department was grossly undervalued.

The department claimed Rs 3,700 crore in tax arrears and penalty from the Indian unit of the British telecom major. Vodafone had argued that the transaction was a capital receipt and hence tax could not be levied on this amount.

However, Vodafone obtained a stay on the claim from the Income Tax Appellate Tribunal in December 2013. But the tribunal directed Vodafone to deposit Rs 200 crore as initial payment and submit bank guarantees for the remaining sum.