Vodafone's Indian Tax Penalty Could Reach $4 Billion

Vodafone could face a potential US$4 billion penalty if the company loses the ongoing tax dispute in India. India's government is seeking to claim up to US$2 billion in tax for the company's purchase of a majority stake in Vodafone Essar - but could impose a penalty which would more than double the amount being disputed.

"This is a high stakes battle," Mukesh Butani, partner and head of taxes at consultancy BMR & Associates told the Financial Times newspaper, "If the revenue department succeeds in its claim to hold that this transaction is liable to be taxed in India, in that situation it also has the right to try to levy a penalty."

Vodafone International Holdings BV and India's tax authority concluded their initial arguments over the tax dispute in the Bombay High Court on Wednesday.

In May, India's government passed a new law which allows it to take action against companies which do not withhold taxes when making a transaction - the core of the tax dispute between Vodafone and the government.

Vodafone International Holdings BV, a company registered in the Netherlands, acquired the entire share capital of CGP Investments (Holdings) Ltd, a Cayman Islands based company from Hutchison International (HTIL). CGP, itself, owns 52 per cent stakes in Hutchison India.

Vodafone Essar has argued that Vodafone Holdings , CGP Investments as well as HTIL are foreign companies and as the transaction was structured through Mauritius, capital gains cannot have been accumulated within India. Also India and Mauritius have a double taxation avoidance treaty, so it would not be possible for India to apply capital gains tax on transactions that are already taxed within Mauritius.

On the web: Financial Times

Posted to the site on 11th July 2008