New Delhi: India took a step closer on Tuesday towards an amicable settlement of the tax dispute with Vodafone Group Plc in a move that is likely to be welcomed by foreign investors, but which could prove controversial in the current political environment.

On Tuesday, India’s new law minister Kapil Sibal reversed his ministry’s earlier stance on a settlement of sorts with Vodafone over the phone company’s 20,000 crore tax dispute with the state. The earlier decision, taken by former law minister Ashwani Kumar, was that a conciliation with the company was illegal.

Government officials familiar with the situation said on condition of anonymity that various options are being considered, including a waiver of penalty and interest and a reduction in the principal amount of tax claimed by the Indian tax department.

Currently, Vodafone is facing the prospect of paying around 8,000 crore of tax, another 8,000 crore as penalty and around 4,000 crore as interest.

Vodafone has been in talks with the finance ministry to seek a mutually acceptable solution. The company did not respond to an email sent by Mint.

The earlier decision taken by former law minister Kumar was that conciliation with the company was illegal according to the provisions of the current income-tax Act.

The law ministry’s recommendation was on a proposal by the finance ministry on the issue that is to be looked into by the cabinet committee on economic affairs (CCEA). It is unclear whether CCEA will discuss the issue at its next meeting, though it is on the agenda, a senior department of telecommunications official said.

The move by Sibal is in concurrence with attorney general G.E. Vahanvati’s fresh opinion on the issue, which says conciliation is legally tenable.

On taking over the additional charge of the law ministry after Kumar was sacked last week, Sibal said he would work to ensure that “legal processes and procedures should not be an impediment to economic growth, but must fuel it".

The move by the government could send a positive signal to foreign investors, who have expressed apprehensions about the aggressive stance by the income-tax department. Though the government deferred the implementation of the general anti-avoidance rules and is said to be considering another look at the retrospective taxation of some overseas transactions, recent tax demands relating to transfer pricing and excise duty payments have again raised doubts about the government’s commitment to provide a non-adversarial tax regime.

Shell India Markets Pvt. Ltd, HSBC Securities and Capital Markets (India) Pvt. Ltd and Vodafone India Services Pvt. Ltd were among the 26 companies that received tax notices under transfer pricing audits involving share valuations in 2012-13, according to the finance ministry.

Interestingly, finance minister P. Chidambaram is set to leave on Wednesday night for a four-day roadshow to London, Paris and Doha to attract foreign investment to India. During his last visit to London earlier this year, Chidambaram had expressed confidence that the row with Vodafone would be amicably resolved by the Indian government. Vodafone’s case was even taken up by British Prime Minister David Cameron during his visit to India earlier this year where he had talked about the need for certainty in tax laws.

“It is good that the government is showing its willingness to consider conciliation," said Sudhir Kapadia, national tax leader at audit and consulting firm Ernst and Young. “But a conciliation in one case is not a remedy as far as providing tax certainty to foreign investors is concerned. The whole issue of retrospective amendment should be looked into in totality."

“The Parthasarathi Shome committee had recommended in its report that retrospective amendments should be used in the rarest of rare cases. This is what will give comfort to foreign investors," he added.

Close