Vodafone Again

With a new dispensation in North Block’s  all important revenue department, the Finance Ministry has in flurry started a long overdue  move to try and get in more Moolah by closing old high value cases like the Vodafone one.

After a five-year slugfest in courts that produced an adverse verdict for the revenue department, the government tried to undermine the effect of the verdict through a 50-year retrospective amendment of the Income tax Act. The move rattled foreign investors and raised serious questions about the notions of fair play and India's respect for court verdicts.

The case arose over the revenue department's move to gouge out $2 billion in taxes from a $11.2 billion deal between two overseas entities - Vodafone International Holdings, a Dutch subsidiary of Vodafone Plc, and Hong Kong-based Hutchison Whampoa and its associate firms.

On Friday, Vodafone India chairman Analjit Singh met finance minister P. Chidambaram, fuelling speculation that a rapprochement was imminent.

The latest initiative from North Block suggests that an old truce offer, which was made about a year ago, has been revived. Under the terms of this offer, Vodafone will have to pay the original tax without any penalties or interest, which the government had threatened to invoke by treating it as an assessee in default. The tax payout could work out to Rs 8,000 crore instead of the Rs 11,000 crore initially demanded, or the Rs 20,000 crore which the government had at one stage threatened to seek.

Chidambaram has asked expenditure secretary Sumit Bose to take over the crucial revenue department to tone down the fulsome rhetoric of its previous secretary who was insisting on the implementation of the general anti-avoidance rule (GAAR). This is a new-age tax measure that developed countries in the west have started to experiment with to stop foreign investors from using elaborate corporate structures and a fund trail passing through a number of tax havens to minimise tax payouts in the country where the income originates. The move to introduce GAAR from April next year had spooked foreign investors who were considering opening ventures in India.

Sources say revenue officials made a strong case that letting Vodafone off the hook would affect a number of other cases. These include the Idea Cellular-ATandT deal, SABMiller's buyout of a 100 per cent stake in Foster's India, and General Electric's sale of its majority stake in Genpact in a $500 million deal.

They argued the total notional loss  to the exchequer may well be in tens of thousands of crores of rupees, something which could well roll into another major controversy, especially if an activist Comptroller and Auditor General took up issues with the government on this.

The government needs to mop up Rs 10.75 trillion in direct and indirect taxes and with the economy going through a slowdown, it’s not yet certain whether tax targets will be met.

The other problem was that the Government had passed a law amending Section 119 of the Income
Tax Act and to repeal it, the move would have to come up before Parliament where the government could well be pilloried for first asking for this all important change and then for seeking to repeal it in a move which could be interpreted to help one single company.

Vodafone which obviously is a long term player in the Indian market which has proved extremely lucrative for it, now seems to favour coming to some kind of a peace deal with the government and has recently said it would consider making a provision against the legal risks of its Indian tax liabilities. The British telecom giant has plans to invest upto $ 4 billion in new telephone licences which are to be auctioned.