New Delhi: The income-tax department will, for the first time, formally levy a tax estimated to be a little more than Rs 12,000 crore, inclusive of interest for belated payment, on Vodafone International Holdings BV as it failed to deduct tax on the money it paid Hutchison Telecommunications International Ltd in 2007 to buy the latter’s majority stake in Indian telecom company Hutchison Essar Ltd.
“Around Rs 12,000 crore-plus”, estimated S.S.N. Moorthy, chairman of the Central Board of Direct Taxes (CBDT), after the Supreme Court on Monday directed the tax department to determine the extent of the firm’s tax liability before 25 October. The precise tax liability would be calculated by an assessing officer handling Vodafone’s case. CBDT will not interfere in the calculation of the final liability, Moorthy said. “(It is) a case of monumental nature which has attracted worldwide attention,” he said.
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Earlier on Monday, Vodafone approached the apex court with a special leave petition against the tax department after the Bombay high court on 8 September dismissed the company’s writ petition challenging the department’s jurisdiction over its 2007 deal with Hutchison, which was concluded through transfer of ownership of a Cayman Islands firm.
Until now, formal communication between Vodafone and the tax authorities had been limited to a “show-cause” on why the transaction should not be subject to withholding tax.
Following the apex court’s directive, the tax department will, for the first time, formally levy a tax demand on Vodafone. The likely demand of a little over Rs 12,000 crore indicates the tax department believes the entire transaction between Vodafone and Hutchison through the Cayman Islands firm was about change in the ownership of Hutchison Essar.
The Bombay high court’s verdict on the dispute had partially upheld positions of both sides and said tax authorities could unbundle different rights conferred through shareholding to tax aspects relevant to India.
According to Moorthy, the tax assessing officer will take into account all factors, including the Bombay high court ruling, before serving an order on Vodafone.
Attorney general Goolam E. Vahanvati, who represented the tax department, said: “In effect, the legal transaction is that you (Vodafone) have taken over the whole business—Hutch is now Vodafone,” he argued. Vahanvati also submitted that Vodafone owed the government Rs 11,000 crore in taxes, before interest.
Earlier, tax authorities had informally told Mint the tax liability on Vodafone would be around Rs 8,800 crore. Given an interest penalty of 12% a year on account of belated payment, the number cited by Moorthy indicated the tax department considered the entire transaction as liable to tax.
According to a senior official of the tax department, who did not want to be named, once the tax department raises a demand on Vodafone, the firm would have to pay up in a month. However, the next hearing before the apex court will be fixed on 25 October. The apex court on Monday also ruled that Vodafone could “move this court for appropriate reliefs”, once it receives the order.
Both Vodafone and the tax department have stuck to their original positions. In a statement, Vodafone said: “We firmly believe that this transaction is not subject to tax in India.”
In May 2007, Vodafone bought Hutchison Telecommunications International’s 66.98% stake in firm Hutchison Essar for $11.2 billion (Rs 50,400 crore today).
Hutchison controlled its Indian telecom subsidiary through a Cayman Islands firm called CGP. CGP’s shares were sold to Vodafone, which consequently became majority owner of the Indian telecom firm. Vodafone’s contention all along has been that existing Indian law does not give Indian tax authorities jurisdiction over an overseas transfer of the kind it did.
The tax authorities dispute the contention and say Vodafone should have deducted tax at source before paying Hutchison.
Shauvik Ghosh contributed to this story.