Vodafone Facing US$2 Billion Indian Tax Demand

Vodafone has been hit with a reported US$2 billion tax demand following its US$11 billion takeover of the Indian operator, Hutchison-Essar earlier this year. Sources told the Economic Times newspaper that India's Income Tax department sent the tax demand for not paying capital gains tax, arguing that the company should have deducted tax at source when making its payment to Hutchison Telecom.

Sources told the newspaper that Vodafone considers that the tax liability lies with Hutchison Telecom, and was included as part of the purchase agreement.

The issue is understood to be based on the interpretation of Section 9(1)(i) of the I-T Act, which states that if any property located in the country is transferred to a new owner, then it attracts capital gains tax at a rate of 22%. The matter is complicated by the legal definition of which subsidiaries carried out the transaction. If the tax department can show that the India based Vodafone-Essar acted as an "agent" of Vodafone in its overseas purchase (arranged via Mauritius) of Hutchison Telecom's shares in Hutchison-Essar, then it may be possible that Vodafone-Essar could be held liable for the tax demand.

Vodafone is understood to be seeking legal advice on the demand and did not comment on the report.

Posted to the site on 5th September 2007