India taxes Vodafone over $2 billion

India taxes Vodafone over $2 billion

Three years after Vodafone’s $11 billion purchase of a 67% stake in Hutchison Essar, an Indian court has ordered the UK-based operator to pay tax arrears of over $2 billion.

In a long running dispute, the country’s tax authorities have ruled that Vodafone should pay a capital gains levy, despite completing the original Hutchison transaction via a Dutch company in which it had a stake. It is the first time Indian tax authorities have billed a foreign company with a tax charge for a transaction made outside the country and has, say critics, raised questions about whether outside investors will in future be reluctant to invest in the region.

“Vodafone is confident that there is no tax liability resulting from this transaction and all the tax and legal advice we have received remains consistent with this view,” said a Vodafone spokesperson. “As Vodafone is the acquiring company, we have clearly not made any capital gain on the sale. We will continue to take whatever actions are necessary to defend Vodafone’s position.”

Vodafone is expected to appeal on the grounds that the transaction took place overseas, but the court has indicated that because the operating assets of Hutchison Essar were in India, Vodafone is accountable to pay Indian capital gains tax.

“Vodafone cannot walk away from its investments in India,” said Emeka Obiodu, senior analyst at Ovum. “If all avenues for appeal fail, it will have to bite the bullet and pay up. Vodafone will be cautious not to harm its operations in the competitive Indian market.”

The Indian telecoms market has already suffered damage to its reputation in the past couple of months after an investigation into the award of 2G mobile licences to new entrants in 2008. Telecoms minister, Andimuthu Raja, has been forced to resign after his ministry sold licences to domestic players with little proven experience of the telecoms market, and then went on to sell its stake in the new companies.

India’s Central Bureau of Investigation has also questioned India’s Prime Minister, Manmohan Singh, over the issue. The Telecoms Regulatory Authority of India has ordered the cancellation of 62 licences awarded to a total of five companies in 2008, including licences held by large international players such as Etisalat and Telenor.

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