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The income tax department has served fresh notice to telecom giant Vodafone seeking past taxes of up to Rs 14,000 crore.
This comes days before the Union budget, when expectations had soared about the government wanting to announce something favourable to clear the mess created by provisions of the law on retrospective taxation.
In a strongly worded notice, the tax department has also said that in case company fails pay tax dues here, its assets would be attached and bank accounts frozen.
The tax department's notice has come as a surprise as prime minister Narendra Modi’s statement on Saturday stated explicitly that retrospective taxes are a thing of the past.
In a statement, Vodafone confirmed the notice, which is actually a reminder that it should pay tax on transition in 2007 under which it bought the entire 66 per cent stake in mobile telephony arm of Hutchison Whampoa to get a toehold in India’s telecom market.
“We can confirm that we have received a tax reminder from the tax department that also references asset seizures in the event of non-payment,” the company said in a statement.
Expressing surprise, it added, “The dispute is currently subject to international arbitration… In a week when prime minister Modi is promoting a tax-friendly environment for foreign investors - this seems a complete disconnect between government and the tax department."
Legal eagles too, were taken aback by the tenor of the notice. “Typically, tax notices do not resort to such threats. This is an overdone notice. The tax department typically sends such notices when taxes remain unpaid for a long time and entities involved are not sound,” partner at tax consultancy firm Nangia and Co, Amit Agarwal said.
While refusing to delve into the possible reasons for the timing of the notice, director at Grant Thornton Advisory Riaz Thingna said the notice could have been served to bring the company on the negotiating table.
Parallel to the arbitration process, the government and Vodafone have started a second attempt to settle the tax matter through negotiations. The first such attempt was given up before it even could take-off.
Vodafone paid $11 billion for Hutchison’s 66 per cent stake in a company running telecom operations. But as the transfer of shares was between two overseas entities, Hutchison paid no capital gains tax. The tax department, however, said that as the transaction involved transfer of assets in India, the tax has to be paid.
The demand was $2.5 billion in taxes slapped on Vodafone as Hutch no longer had any assets in India. This demand was for the withholding tax that Vodafone should have deducted from the payment it made to Hutch for the stake.
The matter was contested in various legal fora before the Supreme Court decided in Vodafone’s favour. In the next budget, the government changed the law that gave it power to tax similar transactions entered into in the past, thus making Vodafone liable to pay tax again.
A similar failure by a buyer of an asset to deduct withholding tax is at root of a tax dispute involving Cairn’s assets in India. The amount of tax sought from the seller Cairn Energy is Rs 20,495 crore. As the UK-based company still has 10 per cent stake in the Indian venture, the government barred the company from selling it. This matter too has gone for arbitration.
As the dispute was raging, Vodafone raised its stake in the company by buying an additional 22 per cent in the telecom venture from an overseas subsidiary of Essar. However, after much protests, around Rs 3,500 crore was paid as tax on the deal that was worth Rs 3.8 billion.
As the government raised foreign direct investment limit in telecom to 100 per cent, Vodafone took over the full ownership of India operations in 2014 after a series of other transactions.
One such transaction involving original promoter, Max’s Analjit Singh, was also at the centre of a dispute on the issue of transfer pricing. The Bombay High Court provided relief to the company by settling the matter in its favour.
Pending tax disputes ensured regular visits of Vodafone global CEOs to India and their regular meetings with the top leadership here.
During his last visit in November last year, Vodafone global CEO Vittirio Colao met the prime minister, finance minister and telecom minister.
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