Verdict expected in Vodafone $2.6B India tax case
A court is set to rule Wednesday on whether Vodafone Group Plc must pay 120 billion rupees ($2.6 billion) in back taxes for its 2007 acquisition of one of India’s largest mobile phone companies.
Vodafone maintains that it isn’t liable for tax on the $11.1 billion transaction, and a verdict in the company’s three year legal fight is expected later in the day.
India’s tax authorities have a fearsome reputation among foreign investors, and the verdict will be closely watched by companies like SABMiller, General Electric and AT&T, who have also been swept up in the tax department’s increasing activism over the last three years.
The implications for them were worrisome enough that top British — though not American — diplomats took up the tax cause, with U.K. Chancellor of the Exchequer George Osborne reportedly petitioning India’s Finance Minister Pranab Mukherjee on the issue during British Prime Minister David Cameron’s July visit.
The Vodafone verdict will hinge on whether Indian tax authorities have jurisdiction over a deal between two foreign entities.
In May 2007, Vodafone International Holdings BV — a Dutch subsidiary of the British telecom giant — acquired a 67 percent stake in CGP Investments Ltd., a Cayman Islands company, which held the India telecom assets of Hong Kong’s Hutchison Telecommunications International Ltd. In June this year, the tax department told Vodafone how much it owed in back taxes.
Vodafone maintains that India has never before sought to tax such overseas transactions between two foreign parties.
The Indian tax department counters that because an Indian asset changed hands, Vodafone should have paid capital gains taxes on the deal.
“Just because you entered into a transaction in Hong Kong and the shares are owned by some Cayman Islands company, it doesn’t mean you are not dealing with an Indian asset,” tax department attorney B.M. Chatterjee said in an interview.
India generated just 7 percent of Vodafone’s group revenues in the year ended March, but with over 100 million subscribers — a third of the group’s total — Vodafone’s fast-growing India business is a key long term asset, according to Moody’s analyst Ivan Palacios.
The timing of Vodafone’s huge tax bill could not have been worse.
Vodafone agreed to fork over $2.5 billion to the government in May for third-generation spectrum, and months of blistering competition among India’s 15 mobile operators has driven down call rates to less than 1 cent a minute.
In May, Vodafone had to write down the value of its Indian business by more than 25 percent, or 2.3 billion pounds ($3.5 billion).
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