New Delhi: China’s move in December to tighten tax laws on the indirect sale of equity in local firms may cast its shadow on Vodafone International Holding BV when the Indian income-tax (I-T) department decides if the firm’s deal with Hong Kong-based Hutch-ison Telecommunications International Ltd to buy the latter’s Indian telecom assets comes under its jurisdiction.
Vodafone was given a deadline of 12 March to submit information on the deal, after which the I-T department would decide if the deal falls under its jurisdiction.
Friday’s deadline marks the second attempt by the department to carry forward a process that could end in Vodafone being asked to pay withholding tax for its deal with Hutchison. The second attempt started on 31 October 2009, when the I-T department sent a show-cause notice to Vodafone asking why it did not have the jurisdictional right to tax the firm.
Soon after, in a separate development, China issued a circular that stated the country’s tax authorities had clear jurisdiction over indirect sale of equity interests in Chinese resident firms through disposal of shares in a non-Chinese intermediate holding firm. The Chinese tax authorities’ move mirrored the ongoing attempt by Indian authorities to bring similar transactions within their jurisdiction.
Vodafone’s disagreement with Indian tax authorities began in 2007 after it paid $11.2 billion (Rs50,960 crore today) to buy Hutchison’s 67% stake in local telecom firm Hutch-ison Essar, subsequently renamed Vodafone Essar Ltd.
The government approved the deal in May the same year. Hutchison, the seller, controlled its Indian arm through a web of firms that finally led to a Cayman Islands-registered firm. Vodafone bought the Cayman Islands firm from Hutchison.
The I-T department felt the Cayman Islands transaction was essentially a transfer of Indian assets, and Vodafone should have deducted tax at source when it paid Hutchison. Vodafone has said the deal did not fall within the jurisdiction of Indian tax authorities. In 2007, Vodafone approached the Bombay high court and subsequently the Supreme Court on the issue. In January 2009, the apex court told the firm it was for the I-T authorities to decide on the fundamental question of jurisdiction.
I-T authorities had earlier told Mint that the Vodafone case was critical as the potential tax liability, $2 billion, was large and the case could set a new precedent.
“Based on observation of courts earlier, Vodafone would be entitled to explore a writ option if the tax officer comes out with the order he has jurisdiction on withholding tax,” said Sudhir Kapadia, tax market leader at audit and counsulting firm Ernst and Young.
A writ option can be invoked if anyone feels that their fundamental right has been violated and, therefore, they can approach the judiciary for quick remedy.