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Vodafone Asks Indian Supreme Court to Halt Tax Penalty

Vodafone has petitioned India's Supreme Court to halt penalty proceedings from India's tax authorities, which claim the company owes taxes related to a 2007 acquisition.

Vodafone has been fighting a tax demand of 112.2 billion Indian rupees (US$2.5 billion) before the Supreme Court. The dispute has run for about three years in various courts in India.

A tax penalty does not arise when the tax claim itself is being disputed, a spokesman for Vodafone said on Tuesday. The next hearing of the tax case is expected in July, but Vodafone expects to be heard on its current petition on Thursday, he said.

India's Income Tax department insists that Vodafone should have collected tax from Hutchison Telecommunications International in 2007 when Vodafone paid $11 billion to Hutchison for its 67 percent stake in its Indian joint venture, Hutchison Essar. The mobile operator was subsequently renamed as Vodafone Essar.

India's income tax laws require that tax should be deducted before a payment is made to a foreign company or nonresident for assets in India.

Vodafone claims that it is not liable to pay tax on the transaction, which was executed outside the country by two foreign companies. Vodafone charges that established tax laws are being reinterpreted in a completely new way, and there are no previous examples of such taxes being imposed in India on a similar overseas share transfer, the company said in a statement on Tuesday.

Vodafone said it was hard to understand the rationale behind the tax authorities seeking to impose penalties on a matter which the tax authorities have, themselves, described as a "test case," the company said on Tuesday. The pursuit by the tax authorities highlights the unpredictable nature of the country's tax policy and is only likely to raise further concerns amongst potential investors into India, Vodafone said.

The tax dispute has not dampened so far Vodafone's interest in India. The company said last week that it paid $5 billion for a 33 percent stake held by India's Essar Group in joint venture, Vodafone Essar. The company took a £2.3 billion (US$3.3 billion) charge for the Indian operation in May last year, citing "intense price competition."

John Ribeiro covers outsourcing and general technology breaking news from India for The IDG News Service. Follow John on Twitter at @Johnribeiro. John's e-mail address is john_ribeiro@idg.com

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