India not to end talks with Vodafone on tax dispute

Dow Jones

New Delhi

India’s federal cabinet has decided not to scrap negotiations in a $2bn tax dispute with Vodafone Group, a top finance ministry official said on Friday, signalling a softening in the government’s earlier stand to bring the talks to a complete end.

“The cabinet has decided not to take any hasty decision regarding review of conciliation talks with Vodafone,” said the official, who declined to be named.

Earlier this month, India’s Finance Minister P Chidambaram had said that talks with Vodafone weren’t progressing and that the government would seek cabinet approval to formally end the negotiations.

The finance ministry official on Friday didn’t say what brought about the change in the government’s stand.

A London-based spokesman for Vodafone Group also declined to comment. Indian authorities have slapped tax notices on several foreign companies over the past few years related to sale or purchase of assets in India, scaring investors looking to put money in the economy. Companies such as AT&T, SABMiller and General Electric Co are among those facing similar tax demands.

These companies and Indian authorities as well have been hoping that the resolution of the Vodafone dispute would provide a framework and pave the way for resolving all such tax cases.

Talks between New Delhi and the British telecommunications company to negotiate a settlement had begun last June. But the two sides failed to reach an agreement even after several rounds of meetings.

Vodafone blamed Indian authorities for moving slowly. New Delhi, on the other hand, said Vodafone was being inflexible and trying to combine a separate unrelated tax claim.

The dispute under negotiation relates to Vodafone’s $11.2bn purchase of a 67% stake in an Indian cellular operator from Hong Kong’s Hutchison Whampoa in 2007. Indian authorities had demanded more than $2bn in taxes on the deal.

Vodafone, however, challenged the order in court arguing that the deal couldn’t be taxed by Indian authorities as it was between two foreign companies based outside India.

In 2012, India’s Supreme Court ruled in favour of the company. But India’s Parliament passed a law to sidestep the judgment and still allow it to pursue the tax bill. The law allows officials to retroactively tax any deal dating back to 1962, in which an underlying Indian asset was transferred.

The other tax dispute that Vodafone wanted to include in the ongoing negotiations relates to the underpricing of an issue of shares to a Mauritius-based group company. Tax authorities have demanded $604mn from Vodafone on that deal as well. The company, however, has challenged that order.

Vodafone has also issued an arbitration notice to the Indian government citing bilateral investment protection laws between countries. But, Indian authorities have so far not accepted the arbitration offer saying the pact doesn’t allow protection for investors involved in tax disputes.